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Chart of the week

French election with big market impact

Markets have reacted with relief after the results of the first round of the French presidential election were published. Our chart of the week shows how the evolving probability of a Le Pen victory, as derived from bookmakers' quotes, has impacted the risk premia for French sovereign bonds (derived from the yield spread of French bonds over their German counterparts) in recent weeks.

When markets opened on Monday morning, declining risk premia led to rising prices in many markets, for example equities. Meanwhile classic safe-haven investments like gold or the Japanese yen lost in value. The extent of the move in several markets suggests that some investors have been caught on the wrong foot, and were forced to close positions meant to hedge portfolios in the case of an adverse outcome. We would therefore caution against reading too much into the initial market reaction: there is still the second round of voting to come, and several more elections in France and elsewhere thereafter.

Spread France over Germany vs. Le Pen victory probability

Sources: Bloomberg Finance L.P., Deutsche Asset Management Investment GmbH; as of: 4/25/17

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