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Positioning Watch – Hedge Funds are leaning into the Europe trade despite election risks

While there are still substantial premiums priced into European equities and bonds relative to other regions, it has not truly spilled over to FX, where volatility has barely moved. Are markets starting to board the Europe-train again?
2024-07-03

Greetings from Copenhagen!

Markets are still busy trying to digest the first rounds of the French Election, with Le Pen’s party looking historically strong. Premiums on both French equities and bonds compared to German equivalents remain elevated, but we are starting to see the first signs of markets downscaling the risks of placing money in France. 

One of the main risks of French fixed income (in particular) is the historical selloff in French duration from Japan during periods when right-wing parties are gaining political grounds, just as we saw in 2017 when Le Pen reached the second round. With data only available until April, we are yet to discover how much of the move was driven by Asian counterparts, but if Le Pen advances further, expect further volatility in European assets..

Chart 1.a: French premiums are still high, but decreasing

While there are still substantial premiums priced into European equities and bonds relative to other regions, it has not truly spilled over to FX, where volatility has barely moved. Are markets starting to board the Europe-train again?

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