Market angst about France infects whole of EU

Badges for Marine Le Pen, French National Front (FN) political party leader and candidate for French 2017 presidential election, are displayed to sell before a political rally in Saint-Raphael, France, March 15, 2017. REUTERS/Jean-Paul Pelissier

LONDON (Reuters Breakingviews) - France’s presidential election is fomenting deep anxiety in markets. Currency options prices show investors have rarely been so worried about how a single event might weaken the glue that holds the European Union together. Blame far-right candidate Marine Le Pen, whose promise to reshape ties with the EU if she wins would be an existential test for the whole bloc.

Polls suggest Le Pen will lose a second-round run-off on May 7, regardless of whether her opponent is independent centrist Emmanuel Macron or scandal-hit Francois Fillon, the centre-right candidate. Yet investors have been caught off-guard by too many surprises during the French campaign – and by votes in other countries – to take a Le Pen defeat for granted.

The depth of their unease is revealed by the implied volatility of currency options. The difference between one-month contracts, which expire before the second-round vote, and two-month options, which cover the entire election period, provides a snapshot of investor anxiety. For euro-dollar options, this gap hit 2.7 percentage points on March 14 – the widest since 2002 – before narrowing slightly after the Dutch anti-EU politician Geert Wilders failed to make a breakthrough in elections on Wednesday.

Nor are investors focusing solely on what Le Pen might mean for current members of the single currency. Comparable moves in options prices in central and eastern European markets point to a deeper concern about the fate of the bigger European integration project (see first graph:

The gap between the implied volatility of one-month and two-month options is larger for the currencies of EU countries whose economies have converged more closely with the euro zone, such as the Czech Republic. The contrast is even starker versus non-EU emerging market currencies, such as the South African rand (see second graph:

Markets could quickly swing back if Le Pen loses. As last year’s referendum in the United Kingdom showed, investors have no better idea than the man in the street about how elections will pan out. That’s probably why they are so worried right now.


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