France is more likely to elect a moderate rather than an antieuro president. And a fragmented parliament, but still one
where the mainstream parties are the largest, is likely to mitigate tail risk even if Marine Le Pen were to win. We discuss what it all means for the economy and markets.
Strategy implications:
OATs and European stocks are our preferred longs and priced to have the best probability-weighted risk/reward and reasonable upside in our highly likely base case scenario (85% probability that Le Pen loses). BTPs, EURUSD and iTraxx Main have the worst probability-weighted risk/reward and limited upside in the base case. Low implied volatility in EUR and iTraxx Main also offers an opportunity to set downside hedges. In terms of French bank equity, BNP and Soc Gen have an appealing risk/reward, with 15-20% upside potential on a probability-weighted basis.