Investors brace for French election result
new york/seattle — Hedging has become all the rage as investors seek cover ahead of Sunday’s national elections in France that could signal whether the country remains in the European Union.
Prices for protection against wild swings in stocks, bonds and the euro surged last week as polls have tightened and investors fretted that another unforseen election outcome could upend a solid start to the year for risk assets. The cost to protect against volatility in the euro last week hit levels last seen during Britain’s referendum to leave the EU last June, and prices for downside protection in European stocks held near their highest since the US election in November.
“Volatility is increasing as we head into this election,” said Kristina Hooper, global market strategist at Invesco in New York, which has $825 billion in assets.
The latest polls show a tight race, with four candidates — including two who advocate splitting France from the EU — clustered within five points of one another. The top two finishers will advance to a runoff on May 7.
The market’s conventional wisdom had for months held that Sunday’s result would produce a second-round showdown between centrist Emmanuel Macron and far-right candidate Marine Le Pen, who wants to pull France from the EU. Macron, who favours remaining in the EU, was seen winning that head-to-head handily, with the latest Elabe poll showing Le Pen losing ground.
However, neither is totally assured a spot in the May 7 runoff round as both conservative Francois Fillon and hard-left candidate Jean-Luc Melenchon, who also favors an EU withdrawal, were seen narrowing Macron and Le Pen’s lead over them.
Against the heightened possibility that Sunday’s outcome could weaken the economic bloc, some big investors are shying from European assets. Dan Ivascyn, group chief investment officer at Pacific Management, which oversees $1.5 trillion in assets, is among them.
Pimco is underweight France, Italy, Spain and Portugal bonds as they “are vulnerable to success from anti-establishment candidates”, Ivascyn said.
The French election is just one of a spate of worries nagging investors in recent weeks. US tensions with Syria and North Korea and doubts about US President Donald Trump’s ability to deliver tax cuts and infrastructure spending to spur the US economy have also weighed.
“It’s just one more reason for people to cut back a little bit and not be nearly as long,” said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
In their safe-haven response, US investors have snapped up gold, Japan’s yen and US and German government bonds.
In fact, with gold hitting its highest price since early November this week, the GLD raked in $755 million in the week ended April 19, its biggest inflow in two months, according to Lipper data. Meanwhile, the dollar maintained gains for the session while the euro stayed near 1.0700 ahead of the first round of the French presidential elections, with trading flows largely tied to position tweaking before an opinion poll blackout began Friday night.
The greenback rose versus a majority of its G-10 peers, trading as high as 109.33 against the yen after Trump told The Associated Press the White House will release a tax plan this week. He said businesses and individuals will receive a “massive tax cut”, but didn’t provide more details.
The dollar also advanced to a fresh five-week high against the Canadian dollar, which fell to near its 2017 low at 1.3535. Canada March inflation data missed estimates, likely reinforcing Bank of Canada concerns about weak underlying dynamics in the economy, thereby deflating any expectations for near-term rate hikes. A fifth consecutive day of declines in crude oil also weighed on the loonie. — Reuters/Bloomberg