French Election Volatility Mostly Impacts Indices

The euro gapped higher at the open, but has already given up half of its gains.

The past weekend brought us the French election, an event which has been widely expected to cause an uptick in volatility. Forex and CFDs brokers took measures to limit the impact of a prospective surprise result, but that scenario did not materialize. As widely expected, centrist candidate Emmanuel Macron won the first round by a small margin.

French election polls have been spot on as after 97 percent of the ballot was counted, Macron received 23.9 percent of the vote, followed by far right candidate Marine Le Pen with 21.4 percent.

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A relief rally in the euro flushed some stops above 1.09, as it gapped higher at the open to trade by a bit less than 2 percent. The EUR/JPY performed strongly, opening higher by almost 3 percent. Since market open the gains have receded and the European currency is trading in orderly market conditions around 1.0843, or 1.1 percent higher against the US dollar.

Media Noise Bad Predictor of Black Swans

The mainstream media has been actively stirring panic amongst investors in recent months. Analysts that have been notably cautious about the French election regularly warned us about a doomsday scenario, such as a run-off between far right and far left candidates Le Pen and Melanchon.

Polling companies have done a great job in France, following up on the disasters in the UK and in the US. In a similar way, not many people were anticipating the Swiss franc black swan in January 2015.

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Pundits have been notoriously wrong when predicting black swans, the rule of thumb being that an unexpected event occurs only when not many people are talking about it. Investors have been jittery during the past couple of weeks, pushing the spreads between German and French government bonds higher to protect their positions.

Brokers Anticipated Correctly that Indices are the Main Movers

The unwinding of positions of EU bonds investors led to a compression of spreads and a rally in the euro and European indices. The French CAC 40 opened close to 4 percent higher, which could have had some negative impact on clients that were holding short positions overnight.

cac 40
Chart of the French CAC40 index post-French presidential election, Source: TradingView

Brokers have anticipated such a scenario, calling for increased collateral requirements on index positions. French bank stocks are higher by over 8 percent as of writing, as the prospect of a systemic outflow from the banking system of the country has been averted.

Nevertheless, political risks in France remain. Mr. Macron is a candidate that is not a member of one of the two major parties in the country. But parliamentary elections in France where the establishment parties could make a comeback are just a month and a half away and could make reforms difficult.

Mr Macron has started on his way to the Presidential palace, but his success hinges on the performance of his party ‘En Marche!’ in the June legislative election.

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