Who's afraid of Marine Le Pen?
Worries that the far-right National Front leader will sweep to power in France this year are fading. Independent centrist Emmanuel Macron is riding high in the polls, and support for Alain Juppe, the veteran poised to replace beleaguered yet defiant Republican candidate Francois Fillon, is also firming up.
With Le Pen's first-round lead no longer looking unassailable, markets are tempering their view of France as a stick of dynamite at the heart of the euro zone. The difference between French and German government bond yields has narrowed in recent days.
But as tempting as it may be for hard-pressed hedge funds to now put a bet on French politics, they may want to look up the English for fais pas ca. It's too early and the race is still too open.
If last year's political shockers taught us anything, it's that polls are no help, voters are unpredictable and financial markets can make very smart people look dumb. The Bank of England's chief economist compared himself to a dodgy weatherman after the post-referendum crash he predicted failed to materialize. Likewise, plenty of Wall Street strategists scrambled to change their tone after predicting a sell-off or prolonged uncertainty if Donald Trump won the U.S. election.
Yet here we are in 2017, seeing polls, voter intentions and post-election trade ideas all moving asset prices before we even know who is going to be in France's second-round run-off on May 7.
Forget the fact that nobody can even agree on what a Le Pen victory might mean for markets (it's both good and bad for the euro, depending on who you ask.) We don't even know for sure whether Fillon will be in or out of the race come April, judging by his fiery rally on Sunday, or whether the two Leftist candidates currently deemed irrelevant will decide to form a strong united front. Macron's lead may be reassuring, but it is based on only one poll -- and a very tight one at that. One fund manager tells me he wouldn't put a ten-pound note on the outcome of the French election, let alone ten million.
The temptation to make bold political calls is likely to be strong. Hedge funds had a rough 2016, with investors yanking $111.6 billion, including almost $10 billion from macro trading strategies, according to Bloomberg News.
Those lucky enough to have a fresh mandate from clients will find it hard to justify sitting out a political risk event like France -- especially with global stock markets at record highs and interest rates near their lows. Many hedge funds have so far been bearish on French assets, according to Lyxor strategist Philippe Ferreira. They may now try to reverse course.
But patience and humility are virtues. Who can forget fund manager Crispin Odey the morning after the U.K. voted for Brexit, looking pleased as punch after calling the referendum correctly? "The morning has gold in its mouth," he told the BBC after making 220 million pounds ($269 million) in the wake of the vote. He then managed to get everything pretty spectacularly wrong after that, with his fund losing 50 percent of its value in 2016 -- the Bank of England's fault, apparently. You can be right on the night and still burn your fingers.
The French election is by no means over. Market swings and polls are likely to tempt traders beyond their comfort zone. The only sure bet is that the hedge-fund graveyard isn't full yet. And if contrarian scenarios of a Le Pen victory and economic turmoil come to pass, volatile market moves will spread the pain well beyond those wealthy investors who can afford to lose money. Good luck coming out unscathed.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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