Eyes on markets, euro as French go to polls
Analyst who predicted Trump’s victory bets on a Le Pen win
MARKETS are underpricing the euro at the prospect of Marine Le Pen winning the French election as a sea of undecided voters throws into sharp relief apathy for centre-leftist front runner Emmanuel Macron and the backlash against the EU project.
That’s the opinion of Charles Gave, founder of asset-allocation consultancy Gavekal Research, who predicted the triumph of Donald Trump in the US election and is now betting on a win for the antieuro National Front candidate.
“Le Pen’s momentum is a slow-moving reaction against the men of Davos – as we have seen with Brexit and Trump – but markets don’t want to believe it,” he said before the first round of the poll today.
Given the prospect of a Le Pen victory, Gave, who has been researching tactical asset allocation for over 40 years, is advising clients to adopt long positioning in the pound, as the UK would benefit from haven bids, and shorts on inflation-linked German bonds amid the risk of deflation in the euro area.
“The market is talking about the nightmare scenario but it’s not pricing it in,” said Mark Tinker, head of AXA Framlington Asia. Tinker’s a Gavekal client, and admirer of Gave’s tail-risk warnings over the past year.
“After Sunday (today), we will have more information to make a considered risk-return wager to trade and hedge but high-quality European companies and German bonds look like an attractive bet,” he said.
Markets are pining for a scenario that would preserve the status quo – Macron, an independent candidate, defeating Le Pen in the second round on May 7.
The euro held steady on Friday and French bonds gained after a police officer was shot dead in Paris, which might influence the outcome of the first-round vote, analysts said.
The stars, however, appear to be aligning for the National Front candidate, said Gave. The fact two candidates for the run-off were likely to be determined by voters who had yet to make up their minds – as many as 40% – was a bad omen for the centrist contender.
At least half of the far-left and half of the centre-right wouldn’t vote for Macron in the second round if he was pitted against Le Pen, believing he was “tainted” by his association with Francois Hollande’s government, and would rather abstain, Gave said.
Supporters of Francois Fillon, a centre-right candidate whose momentum has been curtailed by graft charges, and a sizable chunk of Macron’s followers, would probably rally to Le Pen’s cause if she were to face leftist Jean-luc Mélenchon in the final round. Only Fillon had a chance to defeat Le Pen in the run-off.
If she won, the euro would tank and there would be turmoil in the European banking system, Gave said. – Bloomberg