There’s a lot to like about what you’ll read at the end of this post from Bloomberg’s Cameron Crise.
You’ll note that everything he says has been variously discussed in these pages exhaustively over the past several weeks. There’s the “gridlock” problem, there’s a reminder about how quickly this market has learned to BTFD on potentially destabilizing geopolitical outcomes, there’s a nod to the hedging that’s readily apparent in FX and equities, there’s a mention of the fact that FX is going to be the only means by which traders can express a knee-jerk reaction, and there’s the contention that no one should panic.
All of those points have found expression in dedicated posts here at HR – some of which this very morning.
One thing to note as you read Crise’s commentary is that earlier today, the ECB suggested that in the event something goes horribly awry, the governing council is ready to step in with the infamous ELA crutch. Here’s Reuters:
The European Central Bank could provide emergency cash to French banks if needed after the first round of France’s presidential election on Sunday, but it doesn’t expect such a move will be necessary, ECB policymaker Ewald Nowotny said on Saturday.
“If there should be problems for specific French banks liquidity-wise, then the ECB has the … ELA, Emergency Liquidity Assistance, but we don’t expect of course any special movements,” Nowotny, who is Austria’s central bank governor, told reporters at the IMF and World Bank spring meetings.
Do note that the very fact Nowotny felt the need to say that underscores the contention that this is a riskier scenario than a lot of people seem to think.
The electoral event of the year is finally upon us. While investors are right to be cognizant of the risks posed by the French presidential election, by the same token it’s important to keep them in perspective. Maintaining a clear head is important, particularly as the initial market reaction is rarely the correct one.
- While the election of a new French president is an important event, the risks that it poses are not systemic. While many market participants may disagree with the policies favored by certain candidates, remember that campaign promises are easier to make than deliver.
- One need only look to the U.S., where the new administration has failed to make much headway in executing its campaign platform despite dealing with a Republican-controlled Congress. Melenchon and particularly Le Pen, on the other hand, would almost certainly face a “cohabitation” with a parliament and prime minister hostile to their policies. Gridlock is a likely outcome should one of them occupy the Elysee Palace.
- There is of course a small chance that a protest candidate wins and manages to strong-arm the country into a referendum on Europe and the euro. That would certainly engender plenty of volatility. Then again, isn’t that why we’re pricing a risk premium into markets to begin with?
- Precedent suggests that the initial reaction to the election result will be unreliable, to say the least. Recall that FTSE futures fell 10% on the night of the Brexit vote. A week later, they were higher.
- On the night of the U.S. presidential election, S&P 500 futures fell more than 5%. They were up on the day by lunchtime.
- The U.K. equity market reacted enthusiastically to the Tories’ stunning electoral victory in 2015, rallying more than 4% from the election day low with 48 hours. Most of those gains swiftly ebbed, however, and the FTSE didn’t reclaim its post-election peak for nearly 18 months.
- Unlike these examples, the French election result will come out over the weekend. It will be left to the foreign exchange market to provide an initial reaction. Monday morning FX price action in Australasia is notoriously erratic; leaving stops in can be a dangerous proposition.
- Either way, what you see on your screens as results come filtering in will not necessarily be what you get a few days down the line. That’s particularly the case this time as there is a second round to come in a couple of weeks.
- This election is an important market event, no doubt. But it’s not systemic, and in the fullness of time even an adverse result may not matter that much.
- Be aware of the risks, but keep your head and don’t necessarily believe your screens on Sunday — or much of the hype.