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Once Bitten, Twice Shy

09 February 2017 by lberuti

Over the last 12 months, market participants were caught completely off guard by Brexit and by the results of the US presidential elections. This time, they do not want to find themselves accused of having neglected any tail scenario. So, when the French presidential bid of Republican nominee, François Fillon, begun to falter after allegations he employed his wife and two of his children as paid legislative aides without them effectively working, investors rushed for hedges as the election’s outcome became far more uncertain. They sent the OAT-Bund spread to a 4-year high, they bought protection on iTraxx Main and sent the 5-year risk premium of France above 50bps from 28bps in October. With a few polls showing that, in all scenarios, a victory of the far right – and the explosion of the Euro that might ensue - still does not appear to be in the cards, French election jitters subsided somewhat. However, if the 5-year risk premium of France stopped widening, there was no snap back and it was still trading at recent wides.