Political Turmoil Returns To Europe: French-German Spread Blows Out To Five Year Wides

Tyler Durden's picture

Despite a calm start to European trading, with local equity bourses posting solid early gains, European political fears have returned this morning, leading to a blow out in French government bond yields, pushing the 10y yield now higher by 5bps and 5y up 8bps, as early losses extend after latest poll shows support for anti-euro presidential candidate Marine Le Pen rising in both election rounds.

As a result, the French-German 10Y govt spread has jumped to 85 bps, following an accelerated selloff, to the widest level since July 2012.

As Bloomberg notes, after opening tighter vs core bonds, OATs have been pressured as talks between left-wing candidates Melenchon and Hamon are set to continue, while Bloomberg reports that Emmanuel Macron may have harmed his own campaign after becoming entangled in controversies over France’s colonial past.

More to the point, the latest daily French election poll by OpinionWay shows first-round support for Marine Le Pen rising by 1 percentage point to 27%. Both Emmanuel Macron and Francois Fillon's 1st-round support remains unchanged at 20%, while first round support for Jean-Luc Melenchon down 1 point to 12% as support for socialist candidate Benoit Hamon stable at 16%. While in the second round, Macron is still expected to defeat Le Pen with 58% of the vote vs 42% for Le Pen, this is a smaller margin from February 17, when the poll showed him at 60% vs Le Pen at 40%. Similarly, Fillon's margin of victory has declined: he would defeat Le Pen with 56% of vote vs 44% for Le Pen, down from 57% to 43% on Feb. 17

Weakness in French bonds is exacerbated by poor liquidity environment, given U.S. holiday, according to a London trader. Additionally as Markit notes, the CDS spread is starting to catch up with relatively insulated Spain.

The return of the European "fear" trade has sent German 2y yields to a record low of -0.85%, down 4bps on the day, as continued selloff in French bonds prompts risk-off moves across core bonds. Bund futures rally to 164.68, volumes surge to the largest of the session, with resistance at 164.64 (Feb. 17 high) taken out

Sharp selling is pressuring peripherals, led by Italy as 10y yield rises 3bps to 2.22%. Adding to concerns about Italy was the previously reported confirmation that former PM Renzi has quit as leader of the PD, triggering a party re-election. Primaries are expected to take place at the end of April or in the first half of May. According to DB economists, there is an increasing probability of a split of Renzi’s PD with the left wing minority apparently intentioned to breakup. They note that if it materialises, the likelihood of a victory of eurosceptic parties at the general election would increase – currently the polls give the PD a small advantage over the 5SM. Hence, markets could interpret a PD split negatively. DB's central case is a break-up of the PD with the consequence being a further increase in political fragmentation by damaging the only large party that remains pro-European. The main question, then, would become how much political support the PD would lose if historical left-wing leaders were to abandon the party. In Deutsche Bank's view, a split of the PD could open the door to a victory of the eurosceptic parties in the coming election.

There was more political concern out of German politics as well: a weekend poll by the Emnid Institute and published in the Bild newspaper showed that the centre-left Social Democrats party have widened their lead over Merkel’s CDU party. The poll found that the SPD’s support increased 1% in a week to 33%, while the CDU’s share fell 1% to 32%. The poll also suggests that the SPD’s overall percentage has increased 12% in the last four weeks. That is the 3rd poll that we have found which shows a 1% lead for the SPD over the CDU, although the absolute percentage share for the SPD is the highest in this latest Emind poll.

As Reuters adds, the SPD's unexpected surge of some 12 points in the last month has caught Merkel and her conservatives off guard, analysts said, just seven months before the Sept. 24 election, where she had expected to win a fourth term easily. The Emnid poll of 1,885 voters gave the SPD 33 percent of the vote, up 1 point in the last week, while the Christian Democrats (CDU) and their Bavarian sister party the Christian Social Union (CSU) would win 32 percent, down 1 point.

The SPD has now gained a record-breaking 12 points in the last four weeks, according to Bild am Sonntag newspaper, since former European Parliament president Martin Schulz was named as its candidate to run against Merkel in the Sept. 24 election.

"The increase is unmatched in the history of the Bild am Sonntag polls," the newspaper wrote.

The SPD, junior partner in Merkel's ruling coalition, had trailed her conservative bloc for years in opinion polls until nomination of Schulz revived the party. It last won an election under Gerhard Schroeder in 2002.

"This is a serious poll showing the SPD coming from nowhere to overtake the CDU/CSU," Thomas Jaeger, a political scientist at Cologne University, told Reuters. "It's amazing to see how unprepared the CDU was for someone like Schulz ... They assumed the SPD was going to stay stuck in the 20-25 percent range. They've been caught pants down."

The confluence of these three political narratives has put French and Italian bonds on the back foot, and has spilled over into underperforming Italian and French stock markets.

Oh, and then there is Greece: today we’ve also got the scheduled Eurogroup finance ministers meeting in Brussels where ministers are due to discuss the Greece’s bailout. Hopes for progress have seemingly stalled until after the upcoming European elections although German finance minister Wolfgang Schaeuble did reiterate his confidence over the weekend that Greece is on the right path and that he also expects the IMF to participate in a third bailout package.

According to a Reuters report, Schaeuble doesn't expect euro zone finance ministers to reach a final deal on Greece at their meeting today in Brussels, a spokesman said on Monday. Euro zone finance ministers are meeting in the Belgian capital to assess Greece's progress in fulfilling the conditions of its bailout.

"We do not expect a final agreement from the Eurogroup meeting, rather it is an evaluation of a progress report, and with this expectations the minister left to Brussels," Finance Ministry spokesman Juerg Weissgerber said.

"We hope that the institutions can return relatively quickly to Greece," he added.

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VinceFostersGhost's picture



Send in moar migrants........that should fix it!

wildbad's picture

watch the left in Germany! there is a woman named wagenknecht who is on the good side of many issues and many middle way germans are grasping at any straw to avoid further intercourse with merkel or schultz.

of course her party's solutions will be big statist but her rhetoric is drawing MANY MANY MANY germans in.

Croesus's picture

Anything's better than Germany's Libtards...

walküre's picture

You mean generally or specific in Germany? US libtards are also prime candidates to being institutionalized and Canada's libtards are now beginning their biggest demographic suicide ever by inviting all illegals from the US.

Imagine 10s and 100s of thousands illegals walking into Canada this summer. That place will be trashed for eternity.

gatorengineer's picture

I never understood why the left doesnt understand that the parasite will kill the host. (figuratively and literally)...

walküre's picture

Because the Left (capital L) then dreams of incarcerating an entire people and demand they work, work, work for the elite at low wages, no prospect for any betterment. Consequently communism will always fail but that doesn't mean the brainwashed masses won't crave it again and again. Just like religion.

Winston Churchill's picture

How could we tell?.

Toronto looked like Islamabad back in the 70's, the one and only time I went there.

847328_3527's picture

The Caliphate will handle everything. Mohammed the Terrible will restore order!

gatorengineer's picture

The bankers haven't realized that Islam has laws against direct interest....  I will loan you a million today,and you will give me that back and gift me 5 goats a sheep and two little boys....

walküre's picture

try Sharia banking and try to call in the loan even when you play by their rules .. good luck.

BorisTheBlade's picture

That's not manly enough, try Shariah banking and take a loan in an Islamic country.

oncemore's picture

Exactly. Sharia has a solution for every situation.


gatorengineer's picture

a whole 10 basis points, its as if no one screamed out and were suddenly silenced..... slow news day

walküre's picture

March - election of Wilders in NL

May - election of Le Pen in FR

sometime between May and September - election of anti-Euro party in I

September - election of whomever in DE .. doesn't fucking matter anymore at that point

German better start controlling borders to NL and FR before Moroccan scum walks into Germany.

NOBODY wants or needs Moroccan or Algerian scum in their cities.

gatorengineer's picture

Not when they can have Afgani, or Iraqi scum provided by the giverment for free.

walküre's picture

ah shit, just exclude them all .. nobody asked me if I agreed to this invasion. There's no benefit and nobody I know has experienced any of the blessings that were supposed to be bestowed on us by inviting them.

ON topic.. Schulz is an idiot. He's living in Lalaland and has no clue how to run a country. He has ambition and lots of vision(s?) of grandeur but he's not a nationalist.

What Germany needs is good nationalist leadership. Period.

gatorengineer's picture

I throw up in my mouth everytime I hear Merkel and her conservatives.

jm's picture

Thanks Mrs. Watanabe.

Megaton Jim's picture

The news of the day is legs. Go out and spread the news!

HenryKissingerChurchill's picture

The SPD has now gained a record-breaking 12 points in the last four weeks, according to Bild am Sonntag newspaper..."The increase is unmatched in the history of the Bild am Sonntag polls," the newspaper wrote... published in the Bild newspaper showed that the centre-left Social Democrats party have widened their lead over Merkel’s CDU party...

please notice that BILD corporate mission is to defend trans atlantic interests
they are factually all NATO fake news

Die Anstalt here: https://youtu.be/hnH10TfhkOQ wiki here https://en.wikipedia.org/wiki/Atlantik-Br%C3%BCcke and here http://meedia.de/2014/07/29/einstweilige-verfuegung-gegen-die-anstalt-zd...

They are screaming in every possible media in Germany (ALL fake news) that the whole Germany is suddenly in LOVE with Schultz which is also a fücking EUROCRAT.

yeah right Germany wants more EUROCRACY riiiight!

Herdee's picture

If Germany attempts to practice economic war on countries leaving the EU we could eventually see military action in order to take-out the EU heirarchy.

silverer's picture

Just a civil war is all. No big deal. It only becomes military if they try to pin this one on the Russians.

silverer's picture

As soon as you start costing some people a lot of money, you have to fear for your well-being. Le Pen had better get a nice Kevlar outfit.

itstippy's picture

The ECB is allowed to buy and hold a maximum of 1/3 of any given Euro country's total government debt.  I wonder where they're at for France and Spain and Italy?  They're already prohibited from buying more German debt because the return rate of -0.85% is below the ECB rate of -0.04% ( can you believe this shit?).  The ECB will not release data about its balance sheet that's granular enough to determine how much government debt they're holding by country.

If spreads continue to grow between German bunds and the rest of the core Eurozone nations' government debt it'll mean the ECB is no longer able to close the gap via QE purchasing.  What would happen if actual market forces took over the Eurozone government bond market?  Who knows!?!  Draghi may have to pull another "whatever it takes" move to keep from finding out.  Stay tooned . . . 

NEOSERF's picture

Brexit and Trump caused "animal spirits"...why fear LePen?