Markets implications of France as a member of EU periphery

Perhaps the financial markets begin to perceive a high risk regarding the elections in France. France’s 10 years’ sovereign bond risk spreads over Germany jumped to almost 80 basis points, highest since 2012 when the idea of Front National (FN)’s Marine Le Pen becoming President someday was very unlikely. The complexity of the political situation makes it impossible for markets to price the risks.

Le Pen is polling at 27% in the first round vote, while En Marche (EM)’s Emmanuel Macron and Les Républicains (LR)’s François Fillon remain tied at 20% each. To complete Donald Trump’s strategy requires that Marine Le Pen wins the election in France, in order to have with the UK out of Europe, also a strong ally within the EU. In our view, and according to our surveys, the FN’s chances to win the elections have never been so high.

As a result the US would have a special relationship with the UK and a strong understanding with France, all this building a clear anti-Germany front on financial and economic issues. The economic recovery plan in the US with major infrastructure projects combined with a massive tax cut and “balanced” protectionism could increase the popularity of Trump, who is currently at 51-55%, according to Rasmussen Reports (the only company along with Cyceon that had given the lead to Trump in the presidential race).

Finally, we believe that the impeachment procedure against Trump is excluded because if the liberal establishment was really in possession of a “smoking gun”, the conclusive evidence of some complicity between Trump and Russia would have already been made public weeks ago. On these considerations, the US financial markets continue to set new records but we do not yet see any evidence that could justify the emergence of a bubble.

The global economy continues to enjoy in fact a moderate GDP growth rate and many areas are still suffering from deflationary pressures which favored a reduction in production costs, and thus moderate growth and steady corporate earnings. The containment phenomenon in commodity costs has not come yet, supporting the hypothesis of further continuation of the current bull market.

Of course the victory of Geert Wilders in The Netherlands and Marine Le Pen in France could however provide a healthy pullback.

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