Société Générale says Euro Betrays Market Complacency Ahead of Sunday's French Election

Above: File image of Marine Le Pen. Source: Global Panorama, Flickr. Licensing: Creative Commons 2.0.

French investment bank and lender Société Générale have looked at a number of financial market indicators and conclude the market might be a little too complacent heading into the second round of France's presidential election.

Analysis conducted by the Soc Gen finds "less French political risk priced into the euro than appears at first glance."

For starters, French bond yields don’t show significant signs of stress about the presidential election which will conclude this coming Sunday.

They present the following chart:

Above: "French bond yields don’t show significant signs of stress about the presidential election" - Société Générale.

"Our event tracker, FX volatility, and betting websites all suggest that the second round of the French presidential election will be a non-event," says Soc Gen analyst Kit Juckes.

Soc Gen's event tracker, FX volatility and betting websites all suggest the second round of the French presidential election "will be a non-event".

"But we all know those reflect the war in Ukraine to a far greater degree – indeed, we reckon that the impact of the election itself on the current value of the euro is very small indeed," says Juckes.

In short, there is very little concern priced into markets by way of French political risks

"The expected Macron victory could provide a small, temporary relief rally for the currency, but the far bigger move would come from a shock outcome," says Juckes.

Soc Gen's FX EventTracker model finds the outcome of the first round of the French presidential election did not shift the implied market pricing for the second round.

"Even worse, the election premium is now slightly down since the first round. Arguably, the Macron/Le Pen re predicted by the polls, and run was this tight second round is not a surprise," says Juckes.

He warns Macron is leading by a margin that is less comfortable than five years ago and positions in EUR/USD options might look complacent as a result.

"The trend indicated by the polls that follow the debate should be monitored carefully," says Juckes.