Kristian Rouz — In a similar fashion to the pre-Brexit referendum market dynamics, European traders and investors have expressed mounting anxiety over the upcoming presidential election in France, set for 23 April. The steep ascent of the right-wing populism over the past year in Europe and the US has led many observers to believe the far-right candidate Marine Le Pen has a serious chance of winning the Republic's Presidency, pulling France out of the Eurozone and thus reshaping the economic landscape of Europe.
Melenchon's leftist agenda is an even greater concern to the European markets than Le Pen's isolationist aspirations, as the immediate effects of the right-wing populism to the economy have been observed in the UK and the US over the past several months. Meanwhile, the leftist emphasis on greater wealth redistribution in the slow-growth environment is deemed quite alarming.
"The rise of Melenchon reminds us that Euroscepticism is a more widespread phenomenon across much of Europe than many believe, and that a runoff between Melenchon and the Front National's [Marine] Le Pen would certainly give financial markets palpitations," BNP Paribas Investments Partners said in a note.
The fears of Frexit have fuelled the market anxiety in Europe this week, which is poised to mount as the election draws nearer, peaking on 23 April. The spread between the French and German 10-year government bonds hit a seven-week high at 0.75pc. The Deutsche Bunds are a more sustainable market tool in terms of both the yield and value, whilst the French debt securities are tanking in value, accompanied by a rising yield.
Amid these concerns, the euro fell to a one-month low to $1.0579. Le Pen's victory would inevitably pull the Eurozone's second-largest economy out from the bloc, affecting the common currency's value to an even greater extent, with the euro-dollar parity becoming a likelier scenario.
Most importantly, however, the broader European market volatility index has seen a dramatic rise in open interest options. The VStoxx (European VIX) options outstanding have increased from roughly 400,000 in early January to the current 1.5 mln ahead of the French election as investors are seeking ways to hedge against the potential market fallout entailing the election.
The VIX (Chicago Board Options Exchange Volatility Index), or its European counterpart, VStoxx, typically increases ahead of the major turmoil in the market. In other words, market participants are aware that in the four-way French presidential election, only one of the four candidates is seen as ensuring the existing market stability, the centrist Macron. Given the 20-percent support of the left-wing candidate Melenchon, almost catching up with the front-runners Le Pen and Macron, there is more than a 50-percant chance the French economic policies are in for a drastic change.
The Vstoxx index has risen by 39pc so far in April alone, and is also at its four-month highest against the VIX Index, measuring the market volatility in the US.
Still, the outcome of the election will determine the pace of growth in France itself. Currently enjoying the ECB stimulus and multiple trade deals, France will have to devalue its own currency upon separating from the Eurozone, should Le Pen win, in order to support the current pace of economic expansion. The left-wing scenario will inevitably entail an initial economic slowdown, and further economic developments will be determined by the efficiency of governmental central planning.
As for now, however, many investors are moving their capital into German debt as a safe haven, whilst others are cashing in on the CAC40 bull market while it lasts, ready to cash out just a couple of days prior to the election.
