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France under a bit of pressure

Bond markets give a clear investor opinion poll on events of the day, and consequences for the future. The Truss mini-Budget tantrum saw gilt yields soar which knocked other bond markets as well. This actually drew comments from US officials, who usually don’t comment on other countries messes.


France is in focus at the moment as the decision to call a snap election is giving bond markets pause for thought. The Guardian has a decent primer on what is at stake and the process. In a nutshell, the bond markets seem worried that a big win by NR over the coming weeks would see a lot of unfunded spending come about, and we all remember the bond market reaction to Truss’s venture into unfunded spending, right?


Odds are that the worries may be overdone. But, time will tell. Ahead of the event, the weekly chart of the 10-yr. bond (OAT) yield shows that yields are above 3% and there is risk of a push to 3.6% again (cycle peak so far made in 2023). A break of this area would open up 4% for 4.8% on swing measures. The latter has not been seen since 2008, caramba!


Bond traders often look at spreads to gauge sentiment as well. In the Eurozone the spread over the German 10-yr. bond (bund) is key. The chart shows that the spread has widened relatively sharply since the snap election was announced from a dozy range trade around 50 bp to spiking to over 80 bp. The flat yellow line just below 80 bp from 2017 is worth keeping in mind as a sentiment signal if broken on a sustained basis (a few weeks). Simple break measures would point to a potential widening to 160 bp or more, which is a big move in these markets.


Clarity will arrive over time. Bond market swings are both risk, and opportunities. Odds are that a few hedge funds will be thinking that current levels offer a pullback to 50 bp/45 bp with a risk of around 10 bp to 15 bp (depending on risk and take profit levels). The big uncertainty is the election of course. Tempting enough? Long term non-French investors are probably not rattled enough (yet) to exit the market, and may be trimming positions or holding back buying until after the election, just in case. Interesting times ahead, and a decent reminder that bond markets still don’t like big unfunded spending plans and uncertainty, for the most part.


The French equity market is also under a touch of pressure. It was only a few weeks ago that saw the CAC 40 make new all-time highs, and the index has lost over -9% since then. The chart below shows that the 50-week moving average is at hand. Chartists will note the double top in place (break below the midpoint). Big rising line support comes into play near 7,000 which serves as a big historical demand point. Often it is the rejection of the pullback that can give confirmation. In this case, watch for a potential bounce back to the midpoint area (or 13-week moving average) and then see if sellers take the chance to get out – or not.



Gerry Celaya, Chief Strategist


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