French markets: what the experts think
● Pfft!
“On Sunday, the French people go to the polls and might just unleash the biggest shake-up in the country – indeed across Europe – for 60 years,” said Patrick Hosking in The Times. “Neither the business community nor the international money markets quite know how to respond.” For them, the “protectionist, anti-big business, fiscally incontinent” National Front leader, Marine Le Pen, is “bad enough”. But the sudden surge in the polls of the far-left firebrand Jean-luc Mélenchon has created even more uncertainty. His “eye-catching” policies include a 100% tax on earnings above s400,000, capital controls, widespread nationalisation, and a 16% hike in the minimum wage. The “nightmare scenario” for French business is that Le Pen and Mélenchon top the initial poll, leaving voters with no moderate voice to choose in the 7 May run-off. But markets have “gazed into the abyss” and muttered an indifferent “pfft”.
● The shift to Europe
If France is offered a choice between “unreconstructed communism and unrestrained fascism”, as one broker somewhat overexcitedly put it, one can only imagine the “carnage”, said John Stepek on Moneyweek. com. Yet the CAC 40 stock index – up by around 18% in the past year – is currently only slightly shy of its alltime high. One reason for that, said Tara Cunningham in The Daily Telegraph, is the flood of investment cash heading into recovering-europe from the US, where the Trump market rally has “hit a speed bump”. Last month, investors snapped up stocks on the Continent “at the fastest rate since October 2015”.
● Bond trouble
French stocks may still be riding high, said the FT, but the strain of uncertainty is showing up elsewhere – particularly in the bond markets, where volatility has been picking up. Yields on French government bonds have generally been close to those of Germany, reflecting their status as “safe” debt. But, as David Owen of Jefferies points out, this relationship has begun to break down. Late last month, the spread between French and German ten-year bonds touched a three-year low. In other words, “French sovereign bonds have begun to perform more like those of peripheral eurozone economies such as Italy”. That should ring warning bells.