While the markets were focused on the evolution of the geopolitical situation and monetary policies in the face of the strong inflationary surge, political risk suddenly returned to the European markets, whether on the sovereign debt market, on currencies or even on the CAC40, after the publication of new polls of voting intentions in the second round.
The most significant marker of this French political risk on the markets is the widening of the spread between the rate of the OAT (10 years French) and that of the Bund (10 years German): this difference was 0.41% last Thursday, it is now 0.55%. That is to say the largest gap since…April 2020, since the first wave of Covid.
This widening of sovereign yields within the euro zone is all the more indicative of political stress in recent days, as it has been stable since the outbreak of the Ukrainian crisis. French and German 10-year yields even tightened in March.
This French political risk is not only reflected between the sovereign rates of France and Germany but also on the Italy-Germany rate spread. Between the 10-year rates of these two countries, the difference was 1.47% last Thursday, it is now close to 1.70%…
We have clearly seen these rates diverge after the publications since the beginning of the week of new polls on tighter voting intentions in the second round.
However, it is possible that part of this widening of sovereign rates also comes from certain differences in Europe on the degree and speed of new sanctions against Russia and in particular sanctions concerning energy, including oil and gas.
This political risk was also felt on the evolution of the euro against the dollar on Tuesday. As the euro moved close to $1.10 in the morning, it quickly retreated 90 points to end the day at $1.09. On the other hand, we clearly cannot attribute all of the fall in the euro against the dollar in recent days to political risk alone: it is a mix between a surge in the dollar, which serves as a “safe haven” currency in the face of geopolitical risk (and therefore a fall in the euro linked to fears of the impact of the Ukrainian crisis on the European economy), a dollar which is also sought after given the differential response between the Fed and the ECB in relation to inflation, and finally political risk for 2 to 3 days.
Last marker of this political risk: the underperformance of the CAC40 for 48 hours against most European stock market indices. All the major European indices fell back on Tuesday and Wednesday, but the CAC40 posted, cumulatively over the two days, a more marked decline.
We cannot speak of “panic” linked to the approach of the French election but of increased vigilance on the part of investors who must now integrate this potential risk with the geopolitical and monetary risks already present.