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Pricing In Political Risk

01 February 2017 by lberuti

After a fairly volatile start to the week, sentiment appears to be stabilising somewhat. Despite a bit of intraday nervousness, daily moves were once again minimal. But if you dig a bit more, then there are concerns in some areas. The moves in the credit market, and particularly among financials, most certainly reflect an increase of the perceived political risks. French and Italian names have clearly underperformed other financials, a move that is also obvious in the interest rate market, where France 10Y spread has widened versus other semi-core countries while Italy 10Y spreads have moved to historically wide levels versus Spain. The troubles of Mr Fillon, the candidate of the French republican party who started the year as the clear favourite and is now undermined by a series of reports about him giving public salaries to his wife and children, threaten to derail his bid for the French presidency and have turned next May’s poll into one of the most uncertain in recent history. Italy would probably face a political deadlock if general elections were held. While most other financial institutions’ risk premia have moved sideways over the last week, the seven worst performers of the sector are French or Italian and they explained the underperformance of the sector compared with the broader market.