By Julien Ponthus and Sudip Kar-Gupta
LONDON/PARIS – French financial markets abruptly acknowledged on Tuesday the risk of far-right Marine Le Pen winning the French presidential elections against incumbent Emmanuel Macron later in April, with sharp losses on government bonds and Paris blue chip stocks.
After initial gains, France’s CAC 40 benchmark quickly accelerated losses to 1.8% by 1111 GMT, underperforming the pan-European STOXX 600 index which was down just 0.2%.
“Markets woke up on Le Pen”, said Jerome Legras, head of research at Axiom Alternative Investments.
Marine Le Pen, whose presidential campaign has gained momentum in recent days, on Monday captured 48.5% of voter intentions in an opinion poll of a likely runoff against Emmanuel Macron, the highest score she has ever notched.
The Harris Interactive poll for business magazine Challenges said a Macron victory – which pollsters had considered almost a foregone conclusion – was now within the margin of error.
As political risk stresses hit, French banks suffered the biggest losses, with Societe Generale, Credit Agricole and BNP Paribas losing 6%, 4.4% and 4.1% respectively.
A broader European banking index was down 1.3%
“We can clearly sense it in the business stream this morning”, said Nathalie De Medina, a sales trader at broker Oddo Securities.
Another trader said the selloff was particularly notable in stocks seen vulnerable to a Le Pen election.
“Look at Vinci and Eiffage, their underperformance is a casualty of Le Pen risk”, he said, pointing to the far-right leader’s plans to nationalise French highway operators.
Shares in French infrastructure group Vinci and Eiffage fell 4.9% and 5.2%.
French government borrowing costs surged, with yields on 10-year debt up 10 basis points and the spread between the yield of 10-year French and German government bonds --- essentially the premium demanded by investors to hold French debt — rose to 54 basis points, levels unseen since the COVID-19 market crash of 2020.
Francois Raynaud, multi-asset fund manager at Edmond de Rothschild Asset Management, said selling French debt — known as OATs – versus the German Bund through the 10-year futures contract was a good way to hedge against a surprise election result.
“By default, it seems judicious to us to take up protection by being underweight in terms of French weightings versus other indexes, or via the OAT futures,” Raynaud told Reuters on Monday, before the latest selloff
The turmoil rekindles memories of the 2017 election when fears of a far-left or far-right win sent French yield spreads soaring towards 80 bps and pushed stocks sharply lower.
Many investors view Le Pen’s platform, which aims to keep the legal retirement age at 62 years, as generous in terms of public spending. She is also viewed as less business-friendly than Macron.
“Le Pen would likely be seen by markets as less reliable on public spending and economic competitiveness, and an unenthusiastic motor and/or unreliable partner for Germany and NATO at a crucial moment for Europe and the West,” NatWest economist Giovanni Zanni told clients last week.
A surprise win for her could deliver a 50 bps hit to French 10-year spreads over Germany, taking them to a similar level as Spain which has a lower credit rating, he reckons.
Adam Cole, chief currency strategist at RBC Capital Markets, said that while a Macron presidency remained the base case, there was a danger of complacency. That could result in a larger political risk premium for the euro in the coming weeks.
“Might financial markets also be showing signs of complacency ahead of the polls? We think that is a significant risk,” Cole argued.
The euro was broadly flat against the dollar on Tuesday, up 0.03% at $1.0973. (This story refiles to add dropped word in para 12)