I’ve talked tirelessly (well, I haven’t gotten tired of it, maybe you have) about the extent to which markets are or aren’t correctly pricing event risk around Europe’s trio of electoral trials by fire.
For obvious reasons, the French elections have gotten the most attention. That’s probably justified given the fact that there’s a non-negligible chance that France accidentally elects a populist lunatic with designs on taking her country out of the EMU, a move that would i) effectively mark the beginning of the end for the currency bloc, and ii) may mark the beginning of the (financial) end for France which, if it exited the euro would technically be in default on…oh, I don’t know.. let’s just call it f*cking $1.7 trillion in public debt.
This month, the market will be watching the Dutch elections closely to see how successful crazy ass Geert Wilders is at marshalling the uneducated vote in the Netherlands (more on that here). “Elections in the Netherlands will set the tone for ballots in France and in Germany this year that will determine whether the voter anger that prompted the U.K.’s Brexit vote and brought Donald Trump to the White House is reverberating across mainland Europe,” Bloomberg wrote on Sunday, adding that “Wilders, who wants to stop all Muslim immigration to the Netherlands, has praised Trump’s agenda.”
The German elections have garnered less attention of late because… well, because they’re further away, for one thing. And while we’re exceedingly unlikely to see some kind of Petry-inspired Reich redux, it’s worth looking to see how the market is pricing things.
As regular readers will recall, I’ve focused primarily on the VSTOXX term structure and the juxtaposition with implied vol in the US. More recently, I took a look at vol spreads, their relationship with OAT-bund spreads, and how they look now versus how they looked in the lead up to the Brexit referendum.
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