Macron’s curveball is roiling the markets

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In a funny and admittedly petty sense, this has been a great week for Europe.

With little fuss, but perhaps a somewhat satisfied grin, Greek Prime Minister Kyriakos Mitsotakis revealed that he planned to withdraw some €8 billion worth of emergency loans provided to the country in the depths of the eurozone debt crisis three years of installments, repayable early.

The country’s government bonds are back in business, with 10-year government bonds trading at a yield of about 3.6 percent. The times of a return of 20 percent or more are increasingly forgotten. Several rating agencies have pulled Greece back from this mischievous move and returned the prized investment grade labels that open up the bonds to slow and steady fund managers. The last scheduled early repayment is a show of strength and confidence.

“The market seemed to believe our long-term target story and also believe that this government is stable and will last in the long term,” Mitsotakis told Bloomberg.

By that measure, the eurozone has come a long way since the dire test of cohesion and leadership posed by the debt crisis a decade ago, when the member states most punished by bond markets for their shaky public finances were rather unkindly stacked together . together as the PIGS – Portugal, Italy, Greece and Spain.

So that’s the good news. The bad news is that the region has a new crop of problem kids who are bugging markets. The even worse news is that they are the biggest kids in the room.

At the end of May, rating agency S&P Global lowered the rating of French government bonds due to fears about the country’s debt burden. At first it was the market that suggested this, but then Emmanuel Macron came. Political strategists are still debating whether the French president’s bold move last weekend to call early elections in an attempt to correct the rise of the far right is a stroke of political genius or a reckless gamble that his opponents could achieve high positions. It is difficult to shake the memory of David Cameron calling a referendum on Britain’s membership of the EU as a way to soften the strife within the Conservative party. How did that go?

Investors are clear that they don’t like it. Lori Heinel, Chief Investment Officer at State Street Global Advisors, joked to me this week that FiGs are the new PIGS, now that France has thrown itself into disarray and Germany (the new G) has its own political and budget struggles. We struggled to agree on the correct I and S, but the markets never allowed details to get in the way of a good acronym.

“We have seen pressure on government bonds and on the euro,” Heinel said. To add to the pain, Heinel said that “we literally just added our Europeans right before [stocks] obesity quite meaningful”. Zut alors.

I suspect this is the case with many fund managers. With the European Central Bank cutting rates and some signs of economic stabilization across the region, investors are increasingly comfortable buying European stocks, both as diversification outside the US and as a decent potential growth story in its own right . As recently as May 20, Morgan Stanley declared that European stocks were in the sweet spot and raised its target for the MSCI Europe stock index to 2,500, some 17 percent above current levels.

Now that can become a reality. The blow to markets so far has been clear but not severe, and could easily be reversed if the election results are favored by investors in early July. France’s Cac 40 index has lost 6 percent since being hit by Macron’s curveball and has now largely erased most of its previously quite nice gains for the year. But it’s not a free fall. The French yield on ten-year government bonds reached almost 3.4 percent at the beginning of this week, but has since fallen slightly. Haven German Bunds have risen sharply in price, but we are not completely panicking yet.

However, we are very alert. “Fasten your seat belt,” wrote Emmanuel Cau and his colleagues at Barclays. “The sentiment-driven pullback may seem harsh, but we advise caution. The campaign will be noisy. The outcomes are difficult to predict and may be a source of greater uncertainty in the medium term. . . Don’t rush to buy the dip.”

What is it that investors really don’t like here? As Barclays analysts explain, the policy platform of Marine Le Pen’s Rassemblement National focuses on protectionism, state intervention and immigration restrictions, which according to the bank “could lead to a significant increase in the government deficit and European integration in could cause danger.” .

The nightmare scenario some investors fear is that an RN government in France would lead to something akin to Britain’s spectacular ‘Liz Truss moment’, setting the bond market on fire in 2022.

This is all still up in the air for now. We don’t know how the French electorate will vote and investors are aware that Giorgia Meloni’s right-wing leadership in Italy has been far from disastrous for Italian markets, as ten-year government bond yields show stable yields of less than 4 percent. But Macron’s wild card is something previously optimistic buyers of riskier assets in Europe could do without.

katie.martin@ft.com