We believe that political risk into the French elections is priced more appropriately in bonds (but not in currencies) than going into the Brexit and US vote.

In the remote scenario of a Le Pen Presidency with supportive government and Parliament, 10Y Bunds could approach 0bp and 10Y France-Germany 200bp, with sharply wider Bund swap spreads (54bp), FRA/OIS (20bp) and EURUSD cross currency basis (-60bp), and higher volatility (Bund implied 6bp/day).

Less extreme scenarios of Le Pen Presidency but cohabitation or extreme left Presidency will likely result in considerably less extreme outcomes.

We reduce but still keep a France underweight in cash, but find better risk/reward in Spain UW, highlight attractive levels on 5Y France CDS, selling high-coupon OATs vs. low-coupon ones.

We recommend Apr17 Bund swap spreads conditional bull wideners via call/receiver spreads. In vol, we add long gamma via deep OTM Apr17 Bund calls. The cross-market we recommend the position for EUR rates outperforming GBP rates via long in Bund calls vs. 3Mx10Y GBP receivers.

The EURUSD forecast already incorporates event risks for Q1, declining to 1.04, then eventual stabilization in Q2 and appreciation in H2 as we approach ECB tapering (Q4’17 at 1.15).

Euro and oil have the decent downside on a Le Pen victory: euro could fall about 10 cents (10%) to about 0.98 over a few weeks and oil could decline by 5-10%.

We expect gold to remain broadly stable as pressure lower from the strong dollar would likely be offset by the stronger demand of an alternative reserve asset.