Goldman Sachs caution clients amid French election

Goldman Sachs has recommended its clients take a short position on French government bond futures maturing in June ahead of two-round presidential elections that begin later this month.

Goldman Sachs caution clients amid French election

The position would allow investors to take a view on duration in a market that the bank considers expensive, its economists said.

Goldman Sachs economists said the upcoming presidential elections could have an effect on French government bonds. They said a victory by either of the centrists, Francois Fillon or Emmanuel Macron, would see the French government bond yield spread over Germany fall whereas a win for either anti-establishment party — headed by Marine Le Pen and Jean Luc Melenchon — would see the gap increasing.

“Given that geopolitical tensions escalated last week, it is reasonable to expect a shift in favour of the US dollar, at least in the short-term,” analysts at Rabobank said in a note.

The euro edged lower and France’s borrowing costs hit their highest level over Germany in six weeks as investors fretted over the rise of far-left candidate Jean-Luc Melenchon in polls before this month’s presidential vote.

Melenchon’s emergence over the past week has raised the possibility that he will square off against far-right leader Le Pen in the decisive second round in May, making the final result far more unpredictable.

France’s bond yield spread over Germany hit 70 basis points at one stage yesterday, its highest since late February.

There was muted trading volumes across many financial assets and the dollar rising to a three-week high underscored investor caution against making big bets in the face of geopolitical tensions in the Middle East and the Korean peninsula.

The dollar inched higher drawing support from US rate hike expectations while global stocks, reaching the point where some see them as expensive, were stuck in neutral ahead of US earnings season this week. The increased geopolitical risks continued to spur investors to move into safer assets such as government debt.

“The market is focusing a bit too much on the extreme possibilities, but I guess with the elections coming up so soon some nerves are inevitable,” said DZ Bank strategist Christian Lenk.

“But at the end of the day I think (the second round) will be Macron versus Le Pen.”

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