According to traders, Institutional and hedge funds are taking no chances, adding exposure to a fall in the euro. The common currency fell for a fourth day, down 0.5% to $1.0920, with Barclays Plc strategists targeting a drop to $1.08. Demand for exposure to low-probability outcomes, as shown by so-called butterflies, has also picked up since one-month options now cover the second round as well.
Investors are dumping French debt, with benchmark yields up 16 basis points to touch 1.16%, the highest since September 2015. That took the spread over their German equivalents, a measure of risk, to the highest since April 2020 the pandemic market turmoil.
Bonds from Europe’s periphery such as Italy and Portugal would be “particularly sensitive” to a Le Pen win, according to Sphia Salim. The end of support from the European Central Bank’s asset purchases is spurring bigger moves.
In stocks, the CAC 40 Index dropped 1.3% on Tuesday, outpacing the 0.8% fall in the region-wide Euro Stoxx 50 Index. Shares with a significant exposure to the French economy such as Airbus SE, Societe Generale SA and BNP Paribas SA were among the biggest laggards.
A significant spread widening in French bond yields would be a “clear negative” for both asset managers and insurance companies.
Le Pen has pledged to re-nationalize highways if elected. Construction and toll road operator Vinci SA also slumped. French stocks overall have outperformed during business-friendly Macron’s presidency.
French politics had dropped lower on the agenda for traders more focused on the broader geopolitical fallout of Russia’s invasion of Ukraine and the impact of soaring commodity prices on central bank policy. Many investors still have an eventual Macron victory as a base-case scenario, which would minimize any perceived risk.
Le Pen is drawing on the cost of living crisis, and those in Macron’s campaign aren’t being complacent. Macron warned supporters at a rally last weekend that political surprises can happen, citing the U.K.’s vote to leave the European Union.
Euro-zone equities underperform U.S. stocks. A surprise win is still a possibility. What then if Le Pen is elected? The impact could be high as the market is currently not pricing this outcome. We could see the euro depreciate across the board, sovereign periphery spreads widen.
A poll on Tuesday showed Macron would beat Le Pen 53%-47% in the runoff, versus a 60% to 40% gap just a month ago. Polls were showing that President Macron will win the first round to face nationalist leader Marine Le Pen in the second round two weeks later.