french election correlations start to rise as investors get nervous 1849302017

At City Index we have been taking a look at correlations this week, specifically how the S&P 500 has experienced a break down in its relationship with other risky assets. One correlation that is, unsurprisingly, holding up, is the relationship between French 10-year bond yields and European stock indices.

We would expect French bond yields and European stocks to be highly correlated as we lead up to the French election, the first round of voting is on 23^rd April. With just over a week to go, the race is getting more interesting as the Far-Left candidate Melenchon is seeing his support surge, while front-runner Macron has seen his chances of winning the keys to the Elysee Palace dip from last week’s high. The risk is that the far left and the far right make it into the second round run-off. Although this outcome still has a slim probability, the market is showing signs of nervousness about a shock result from the French election.

The correlation matrix below shows the short –term correlations between the Cac 40, French 10-year bond yield, EURUSD, Dax and the Eurostoxx index.

Figure 1:

Source: City Index and Bloomberg

Here are a few conclusions:

The strongest correlation is between the EURUSD and the Cac 40. The Cac and EUR/USD had an insignificant correlation of -47% at the start of this month. However, this correlation has turned on its head and is now 99%, which suggests that the Cac and the EUR are mostly moving in lockstep since the polls have detected a surge in support for Melenchon.
At the beginning of April the Cac 40 and French 10 –year bond yield, which we are using as a proxy for French election risk, had a negative correlation of -64%, this has risen to -67% this week.
The Dax and the Eurostoxx index have also experienced increased levels of sensitivity to French election risks this week. At the beginning of April the Dax and Eurostoxx had correlations of -59% and -64% to the French 10-year bond yield, respectively. Since the end of last week, sensitivity has increased to -75% for the Dax and -95% for the Eurostoxx index. This means that when the French 10-year bond rises, the Dax and Eurostoxx tend to fall.
If this repeats itself, then we would expect European stock indices to remain sensitive to French election risks until at least the first round of voting is complete.
If we get more signs that Le Pen and Melenchon are gaining in the polls ahead of the vote on 23^rd April, then we could see an immediate rise in French bond yields, a sell-off in the euro and further weakness in French and European stock indices.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.