Macron curve unsettles markets

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In a funny and admittedly narrow sense, it’s been a great week for Europe.

Greek Prime Minister Kyriakos Mitsotakis has revealed, with little fanfare but perhaps a slightly smug smile, that he intends to repay three years’ worth of roughly 8 billion euros in emergency loans given to the country at the depth of the eurozone debt crisis early.

The country’s government bonds are back in business — its 10-year debt is trading at a yield of about 3.6 percent. The days of 20% or more returns are an increasingly distant memory. Several rating agencies have taken Greece off the hook and returned prized investment-grade labels that open up bonds to slow-and-steady fund managers. The latest scheduled early repayment is a testament to strength and confidence.

“The market seemed to believe in our long-term goal and also believe that this government is stable and will be here for the long term,” Mitsotakis told Bloomberg.

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

Well, that’s good news. The bad news is that the region has a new cohort of problem child markets. The even worse news is that they are the biggest kids in the room.

Ratings agency S&P Global downgraded French government bonds in late May due to concerns about the country’s debt levels. At first the market styled it, but then along came Emmanuel Macron. Political strategists are still debating whether the French president’s bold move last weekend to call early elections in an attempt to reverse the rise of the hard right was a stroke of political genius or a reckless gamble that could propel his opponents to high places. It’s hard to shake the memory of David Cameron calling a referendum on the UK’s membership of the EU as a way to calm disputes within the Conservative Party. How did it end up?

It’s clear to investors that they don’t like it. Lori Heinel, chief investment officer of State Street Global Advisors, joked to me this week that Figs are the new PIGS as France plunges into turmoil and Germany (the new G) has its own political and budgetary struggles. We tried to agree on the right I and S, but markets never let details get in the way of a good short.

“We’ve seen pressure on government bonds and the euro,” Heinel said. Adding to the pain, Heinel added that “literally right before that we added to our European [stocks] overweight quite meaningfully’. Zut alors.

I suspect this is the case for many fund managers. With the European Central Bank now cutting rates and some signs of economic stabilization across the region, investors have increasingly adjusted to piling up European stocks, both as a diversifier outside the US and as a decent potential upside story in its own right. As recently as May 20, Morgan Stanley called European stocks a “sweet spot” and raised its target for the MSCI Europe stock index to 2,500, about 17 percent above prevailing levels.

Now it can still come true. The blow to markets so far has been light, but not severe, and could easily reverse an early July election result that investors like. France’s Cac 40 index has lost 6 percent since being hit by the Macron curve and has now largely erased most of its previously quite handsome gains for the year. But it’s not in free fall. French 10-year bond yields approached 3.4 percent earlier this week, but have fallen slightly since then. Haven German Bunds have jumped in price, but we’re not quite at the point of panic yet.

However, we are on high alert. “Fasten your seat belt,” wrote Emmanuel Cau and his colleagues at Barclays. “Sentiment-driven pullbacks may look harsh, but caution is advised. The campaign will be noisy. Results are difficult to predict and may be a source of higher medium-term uncertainty. . . . Do not rush to buy dips.”

What do investors really dislike here? As Barclays analysts specify, Marine Le Pen’s Rassemblement National political platform focuses on protectionism, state intervention and the suppression of immigration, which, in the bank’s opinion, “could lead to a significant increase in the public deficit and threaten European integration.” .

The nightmare scenario some investors fear is that an RN government in France will lead to something akin to a spectacular “Liz Truss moment” in 2022 in the UK bond market.

That’s all up in the air for now. We don’t know how French voters will vote, and investors are aware that Giorgio Meloni’s right-wing leadership in Italy has been far from a disaster for Italian markets, with the country’s ten-year bond yields stable below 4%. show. But Macron’s wild card is something previously bullish buyers of riskier assets in Europe could do without.

katie.martin@ft.com