French elections: coverage for Macron’s exit

LONDON, April 7 (Reuters) – Suddenly faced with the possibility of far-right candidate Marine Le Pen winning this month’s French presidential election against incumbent President Emmanuel Macron, traders are scrambling to protect their wallets from the risk of market turbulence.

A Le Pen victory, though still unlikely, is now within the margins of error ahead of Sunday’s first round of voting, according to opinion polls. While she no longer advocates abandoning the euro, the markets are worried about her program of protectionism, tax cuts and nationalization. Read more

Berenberg analysts, who now attribute a 30% chance of a Le Pen victory compared to 10% previously, said Le Pen would “throw sand in the EU gears. While not able to roll back European integration, further progress would likely cripple.”

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The exit polls for the first round of voting will come out between 6:00 p.m. and 8:00 p.m. GMT. There will be a televised debate on April 20 and a second round on April 24.

This is how various assets might react and how traders hedge against dips.


A victory for Le Pen in the first round could send the euro, currently around $1.09, down to $1.05, but if she wins the presidency as well as the June legislative elections, the euro could fall below parity with the dollar, warned analysts at Nomura.

They said the demand for currency hedges was increasing the pressure.

Derivatives markets show that risk reversals – or the ratio of puts to calls – in the week-long period spanning the first round of the election have swung firmly in favor of puts or options contracts expecting further euro weakness.

Refinitiv data shows investors have been buying put options on the euro/dollar between $1.07 and $1.08 in recent days and one trader said it was now 10% more expensive than the week last to buy a euro against the dollar at $1.08.

Nomura recommends buying put spreads expiring in one month as this covers both voting dates.

The euro’s implied volatility, an indicator of expected swings, also pushed higher than broader FX indicators. One-week euro/dollar implied volatility is at its highest in three weeks.

“The rise in the French election risk premium could weigh on the euro until the second round on April 24,” said Samy Chaar, chief economist at Lombard Odier in Geneva.

euro implied options


In the bond markets, the spread between the yield on French and German 10-year government bonds – essentially the risk premium on French debt – rose to 54 basis points, levels not seen since the stock market crash of 2020.

Spreads are well below levels seen at the height of 2017’s “Frexit” concerns, but banks say clients have become more French risk averse.

Mizuho rates strategist Peter McCallum noted that short-selling activity was spreading from French bond futures to Italy. Many investors hedge their bond exposure in the more liquid futures market.

Italian bonds actually underperformed French bonds during this week’s sell-off, widening the gap between the two markets.

Open interest rose as prices for French and Italian bond futures fell. This indicates an accumulation of short positions, said UBS strategist Rohan Khanna. ,

“I think there is an appreciation that a Le Pen victory is a matter at EU level,” Khanna said.

Italian bonds “become your main instrument of short selling given all the fragilities of the Italian system”.

French-German bond yield spread


Societe Generale estimates that a victory for Le Pen carries a maximum downside risk of 8% on French equities. But they saw small and mid caps more at risk than the Parisian benchmark index of the CAC 40 (.FCHI) exposed internationally.

Broader European banks and Italian stocks, highly sensitive to EU integration, would also face further decline, they added.

However, traders reported little stock hedging activity. Instead, the choice appears to be to sell bank stocks and motorway concessionaires like Eiffage (FOUG.PA) and Vinci (SGEF.PA), which could be targeted for nationalization by Le Pen.

A shiver fell over French transaction activity, according to one trader, who said “none of my contacts have mentioned anything for weeks”.

euro put options
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Reporting by Saikat Chatterjee, Yoruk Bahceli, Danilo Masoni and Susan Mathew; Editing by Sujata Rao and Bernadette Baum

Our standards: The Thomson Reuters Trust Principles.

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