Political turmoil on the other side of the English Channel may give the pound an improbable respite from its Brexit-induced weakness.<\/p>\n
A presidential-race victory for\u00a0France\u2019s\u00a0National Front leader Marine Le Pen, whose opposition to the euro is one of the hallmarks of her campaign, could throw into doubt the future of the both the currency bloc and European Union, and so boost sterling\u2019s allure, according to fund managers. While polls suggest Le Pen\u2019s prospects of winning the second round are slim, investors aren\u2019t ignoring the possibility, given 2016\u2019s big market surprises such as Brexit and Donald Trump\u2019s U.S. election win.<\/p>\n
\u201cIf we get a Le Pen outcome, that\u2019s going to be a negative for financial stability overall and with that negative for growth,\u201d said Mark Nash, the head of global bonds at Old Mutual Global Investors, which oversees about $37 billion. \u201cWhat you would see in that situation is the U.K. looking better than the rest of Europe. You\u2019d have the issue of the euro zone breaking up and therefore you\u2019d have sterling becoming a safe-haven asset essentially.\u201d<\/p>\n
The premium on two-week contracts to sell the euro versus the pound over those to buy widened above 2 percentage points Wednesday. That was the biggest premium based on end-of-day prices since records began in 2005, Bloomberg risk-reversals data showed.<\/p>\n
The U.K. currency has fallen about 10 percent since the June 23 vote, and currently is at about 84.78 pence per euro. A recovery to 75 pence per euro in the event of a Le Pen win \u201cisn\u2019t unreasonable,\u201d according to Nash. That\u2019s stronger than the level the pair was at on the day of the referendum.<\/p>\n
The outcome of the French presidential election is far from certain at this point. The race is becoming a four-way contest as far-left candidate Jean-Luc Melenchon surges to catch Republican Francois Fillon less than two weeks before voting. While polls show Le Pen is unlikely to become president, markets are still showing signs of nerves. The yield spread between 10-year U.K. gilts and their French counterparts narrowed to the least since 2013 this week.<\/p>\n
The recent out-performance in U.K. bonds was likely due to a \u201cspillover from the European crisis into gilts,\u201d according to Francesco Garzarelli, co-head of global macro and markets at Goldman Sachs International.<\/p>\n
\u201cWe\u2019ve lost France as a core, risk-free market because of the political situation there and so people are trying to find, in this time zone, a market that they can park their money in,\u201d he said in a Bloomberg TV interview on Wednesday. \u201cGilts offer some premium.\u201d<\/p>\n
While a win for the euro-skeptic French politician doesn\u2019t automatically mean a break-up for the EU, if Le Pen does manage to dismantle the bloc \u201cit is certainly good news for the U.K.,\u201d which would\u00a0become \u201ca good alternative to all these economies for investment,\u201d according to Vontobel Asset Management AG\u2019s head of global flexible bonds Ludovic Colin.<\/p>\n
Zurich-based Colin has \u201climited risk to France in the portfolio\u201d given the uncertainty the elections pose. His central scenario is still for a Le Pen loss which will see the euro appreciate against the pound. With that in mind his strategy is to buy volatility.<\/p>\n
\u201cThe vol is so low that the price you have to pay for the insurance is nothing — so if you\u2019re wrong you lose the insurance premium but if you are right you get the convexity that allows you to make a huge amount of return. That\u2019s the sort of position we have in our portfolio right now,\u201d Colin said.<\/p>\n
\u201cBrexit or hard Brexit is a U.K. problem, France can be a global problem.\u201d<\/p>\n
Source: Bloomberg<\/p>\n","protected":false},"excerpt":{"rendered":"
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