Hedges Show Jitters as Fillon Gains: French Election Monitor

  • Traders remain cautious even as Le Pen seen to lose TV debate
  • Fillon vows revenge as poll shows him closing gap to rivals

Perceived defeat in a televised debate and a fresh probe into possible misuse of public funds by Marine Le Pen’s campaign director added up to a bad week for the French presidential candidate.

Tell that to investors. Even as the anti-EU, anti-euro Le Pen’s first-round support appeared to waver, traders weren’t ready to give up on the idea of a major upset in the elections starting in about two weeks.

Here’s a look at what markets indicators show:

The premium investors demand to hold French bonds over bunds edged higher again. It rose to the highest in two weeks on Monday before easing. In the two-year space, the spread reached the widest since 2012 as investors prepare for the first round of voting on April 23.

And it’s a similar story for insuring debt against default. The cost of French credit-default swaps relative to those of Germany has been creeping higher this week. The increase came as pollsters predict a record-low turnout for the vote, which analysis shows may not help Le Pen as much as she’d like.

Pessimism on the euro has jumped to the highest level since the Brexit referendum. The cost of one-month options to buy the common currency against the yen plunged on Thursday to the lowest level since June, relative to contracts for selling. A poll that day showed Francois Fillon made up some ground on his rivals as he promised to go after those he holds responsible for legal woes that have roiled his campaign.

Meanwhile, open interest in CAC 40 options is rising both absolutely and relative to the benchmark Euro Stoxx 50 as traders place bets...

...with wagers apparently skewed toward protection. Implied volatility for at-the-money options that expire in one month is rising, again both in absolute terms and relative to the Euro Stoxx 50.

In fact, April futures betting on Euro Stoxx 50 volatility have remained stable in the past week, while contracts expiring the following month have slumped. That indicates investors are projecting more market calm across Europe after the second round of voting and see little need to hedge.

— With assistance by John Ainger, and Vassilis Karamanis

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