Is France Sending A Warning Shot To Global Financial Markets?

Korey Bauer

I think a lot of investors are focusing on the strength in U.S. equities and simply enjoying the smooth ride since the election!

As the S&P 500 (INDEXSP:.INX) soars to new heights, the VIX Volatility Index (INDEXCBOE:VIX) is reaching multi-year lows. So what will break the winning streak?

I think the market is pricing in fiscal perfection out of the Trump administration while not considering global policy uncertainty.  Here’s one to chew on: Will the French elections derail the rally?

Note that the yield spread between the 2 year German Government Bond Vs. France 2 year Government Bond is blowing out. Bloomberg covered this recently and I think they are on to something. The last time we saw something like this was the 2011 European crisis. Despite the bond market sending this warning shot, global equities continue to push higher showing unbelievable resilience to global risks.

I personally think equity markets are reaching extreme overbought levels and volatility will come roaring back in a big way in coming months.  Keep an eye on the French elections… and the German-France 2 year government bond yield spread.

 

2 year German bond vs. 2 year France bond spread (White)     EuroStoxx 50 (Orange).   chart source: Bloomberg

 

Thanks for reading.

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