On the other hand, bond volatility remains the most stressed among major assets. Why is this relevant? Because the markets closest to the source of stress tend to be the ones that act most correctly. Furthermore, data since the 1970s suggests that when bond volatility is high relative to that of other assets, as it is today, risks tend to be higher.
There is a third factor, more of a technical nature, which is the absence of convexity sellers, which, according to the BofA, is keeping the risk premium included in the VIX persistently high. What they now call the new post-pandemic normality. Analysts at the US bank say they remain betting on pairing hedges that protect against a slow downward bleed in equities with efficient fragility hedges that instead benefit from sharp and sudden shocks.
And now a fourth factor has been added, which is the second round in France, between Emmanuel Macron and Marine Le Pen. The market consensus intensified the use of hedges against volatility, mainly in European stocks due to the risk of a victory for Le Pen in the second round of the next 24. This tends to favor high-quality US stocks and the sector of “value”. That is why they consider that this is not the time to add more risk to the portfolios, but rather to play rotations within the markets and to apply some short-term hedges against volatility. In that sense, it seems that the markets are complacent about a Macron victory, although the probability of a non-market-friendly win by the far-right candidate is not trivial, so hedging should be considered. Although a repetition of the 2017 result, that is, a Macron victory, is discounted, experts assess how the victory of one or the other would affect the stock markets. In this regard, JP Morgan strategists analyzed the implications of the French elections for the markets and argued that, in the event that Le Pen unexpectedly wins, investor sentiment would be affected, given the probable increase in uncertainty about the cohesion of the eurozone, and that its policies do not appear to be unfriendly to the market from a national perspective. However, they point out, considering that parliamentary elections will be held shortly after, in July, Le Pen’s ability to enact his program could be quite limited. On a sectoral level, a Macron win would be broadly positive for French utilities, where nuclear and renewables would be favored, while Le Pen would likely support nuclear power, but would be a clear negative for renewables developers. . In the case of the banks, although Le Pen would encourage consumption via an increase in purchasing power and credit, it is feared that the reaction of the markets to the victory of the opposition would be a rise in credit spreads. The most exposed banks are Crédit Agricole, Société Générale and BNP. While in the consumer sector, the most exposed names are Carrefour, Casino, Elior, Accor, Kingfisher and MADE.com. Beyond the potential impact on consumer sentiment, mergers and acquisitions and the implications of inflation, both Macron and Le Pen propose policies that would support consumers, such as tax cuts (Macron) or VAT reduction on essential products and the elimination of income tax for those under 30 years of age (Le Pen).
Source: Ambito
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