French presidential elections: market jitters abate

CHART OF THE WEEK

As we approach the French elections, there are several methods for measuring how the markets are pricing-in risk. Most are bond-market related, such as CDS levels or, quite simply, looking at the spreads of French bond yields over equivalent German bond yields. Another method is comparing out-of-the-money (OTM) put options (90%) on equities in the French CAC 40 with those in the German DAX.

This measures the premium that investors are willing to pay for protection against the risk of a steep fall in the CAC 40 as compared with the same risk in the DAX.

OUR ANALYSIS

Until the beginning of February, protection premiums were similar. They widened sharply just after the revelations about François Fillon, the centre-right presidential candidate. Since March, however, the spread has tended to narrow. Government bonds and CDS levels also indicate that market tension has eased.

Markets now appear to be pricing in a lower likelihood of a “worst-case” scenario – the one that could result in a referendum on whether France should exit the Eurozone.

The opinion expressed above is dated March 27th, 2017, and is liable to change.

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.


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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée