A bit discredited they may be, but pre-election polls can still set off the jitters .....

Monday 10th April 2017

A bit discredited they may be, but pre-election polls can still set off the jitters .....

ref :- "French Election Risk Reawakens as Bonds Drop, Volatility Jumps" , Bloomberg Markets

You could be forgiven for assuming two things. Firstly, that for all the hullabaloo the French presidential election was beginning to look a bit predictable  --  centre-left "En Marche" candidate Emmanuel Macron and the National Front's Marine Le Pen to pass through to the second round of voting , where the former will gain a substantial victory. And secondly, that after the shock political results of last year, confidence in polls was so undermined that their influence over pre-election markets would be commensurately reduced. Looking at things this morning, you'd have to say on both fronts that it ain't necessarily so .....

The most striking element of the weekend's Kantar Sofres poll is the rise of Jean-Luc Melenchon, a hard-left firebrand with close connections to the Communist party who quit the Socialists on the grounds that their policies were not radical enough. Mr Melenchon is doing a good job of projecting a jovial, friendly image but there's little doubt that markets would take a very dim view if he became a real contender . An agenda that advocates 100 % income tax for those earning above €360,000, a 32hr working work and reducing the retirement age to 60 has obviously found some supporters, but we can assume that they're not numbered amongst those who take a traditional view of what might be good (and what might be disastrous) for an economy.

So the new poll puts Macron and Le Pen neck-and-neck at 24% with Melenchon climbing sharply to 18%, remarkably now a point ahead of Francois Fillon, the centre-right candidate. Mr Fillon of course had looked most likely to become France's next president until the emergence of allegations that he authorized payments of state cash to his wife and family for doing not very much. True or not, his fall down the rankings shows just how suddenly and how fundamentally things can change.

The first round of voting is on April 23rd, the second on May 7th and theoretically at least the poll opens up the possibility of this becoming a genuine four-horse race. Sticking to what is theoretically possible, any combination of two from four could progress into the run-off. That means that there is a (small) chance that the French people might ultimately have to chose between Marine Le Pen and Jean-Luc Melenchon. For most, and certainly for markets, that's a hellish scenario if ever there was one. 

Let's not get carried away --- that's still a very long shot indeed but the new poll has set nerves jangling a little. Such improving prospects for Monsieur Melenchon were not foreseen. We've referred quite a lot to the difference in 10yr yields between French and German government bonds, a spread that widens and contracts as the chances of a market-unfriendly election result in France wax and wane. In early February when investors were at their most jittery, French 10yr bonds were yielding 90 basis points more than their German equivalents as money was taken out of French debt and put into German Bunds  --  remember as prices fall, yields rise and vice versa. The spread fell to below 60bp recently as things calmed down, but this morning has been marked up again to 70bp.

Others manifestations of market nerves are a jump in two-week volatility in € / $ to 10.60 % (from just above 6.00 %) , the highest in three months --  the two week period of course now includes the first round of the elections. The Euro itself has been marked lower across the board, and French stock markets are weaker than other European bourses with bank stocks particularly under pressure. Bloomberg quotes respected judges advocating both a further widening of the France / Germany yield spread and weaker values for the currency , although one might need to be wary of exaggerated moves caused by thin conditions as we get into the Easter period.

To some degree the nervousness is understandable. After all, investors' faith in polls may be compromised but you can't expect them to ignore polls entirely, just as you can't expect the emergence of a bogeyman like M. Melenchon not to bring on some reappraisal of their exposure. It'll probably never happen, though ...... 

Now where have we heard that before ?