The second round of the French election is scheduled for this Sunday, 7 May 2017. If you’re politically inclined, speculating on the likely winner and potential fallout provides some excellent conversation material. For those with investments exposed to Euro’s or the Eurozone, the question turns from entertaining to directly relevant to your bottom line. How worried should you be about a surprise victory for Le Pen, and her promises about pulling France from the European Union?
French election: believe the polls, or believe the market?
While the polls have Macron leading comfortably, their accuracy is problematic for a number of reasons. The huge failure in predicting Trump’s victory back in November ’16 is the latest example of why polls shouldn’t be taken as rule, let alone a guide. A far more reliable indicator is the market, after all, isn’t the market always right?
Let’s have a look at the EUR/USD. The post election gap up on 24 April, as illustrated on the chart, tells you a lot about what the market thought about the election results. For those of us paying attention, the trading in the week preceding the election and the days since tells us even more. There’s no panic (or even sustained) selling, if anything the Euro is holding it’s ground. To me, this says that traders of the one world’s most liquid currency pair are not concerned about a surprise Le Pen victory on Sunday.
Looking quickly at some other markets and safe-haven indicators:
- The French/German bond spread has come in significantly since the election
- The VIX on the S&P500 remains at very low levels
- Both the DAX and CAC rallied strongly on April 24, and have held their ground
- Yields on the US 10 year are steady
- Demand for Yen is soft
- Gold is weakening
Taking all this into consideration, would you say that markets are worried about a Le Pen victory on Sunday? None of the warning signs are flashing right now. Does this mean it won’t happen? Of course not…but people far smarter than myself don’t think it will.
Then again, take a look at the chart below and the rally in the GPB/USD pre-Brexit. Guess the market isn’t always right either.