French Election – We got the markets wrong

As usually, we made the internal assessment of the this weekend’s French elections. Following these latest weeks information paraphernalia we have concluded the most likely outcome would be that both Emmanuel Macron and Marine Le Pen would make the cut to get to the second round, as it came to happen. Contrary to some other voting recent events, we assessed that there wasn’t much room to any other outcome which didn’t include Emmanuel Macron in the final two runner-ups. This would be seen as market and Euro friendly.

We should be happy with the fact that we have consistently got the outcome of the latest binary events right. But we estimated wrongly the pricing the market had placed in other possible outcomes, namely the possibility that the second round would be decided between two anti-European protagonists. It’s clear now that, after the surprises of Brexit referendum and Trump election, the market is heavily pricing outcomes outside the consensus.

At the close of Friday’s session, our ARION strategy had two opened positions: A short EURCHF and a Long on XAUUSD (Gold). To put it simply, our assessment was:

a) if the result of the elections would come out to follow the consensus (Emmanuel Macron included in the final two runner-ups) no large movements would be seen as there would be no relief rally (outcome = consensus would mean business as usual and therefore no large market movements).

b) in the unlikely chance of an unexpected market unfriendly outcome, the market would, in our view, fly to safety assets such as Gold or to CHF, placing our trades in profit.

Clearly it was an error was to assume the market was mainly pricing consensus and not highly unlikely scenarios. The relief rally seen upon the election results, both with a strong appreciation of the EUR and a almost alike depreciation of Gold, showed us that after all market was strongly pricing a surprising outcome, which is in itself a strong paradox.

Whatever were the merits of our assessment, the important point was that we got the markets wrong this time and saw some negative trades with relevance due to the gaps verified at market open. As well as we point it out when we get it right, we do acknowledge when we get it wrong. We got it wrong this time and we are therefore sorry for the profits the strategy gave back due to this misread of the situation.

The positive point is that ARION is a highly diversified strategy and the impact was after all of limited dimension and not dramatically hard to be recovered. We took however our learnings from this event and know now that consensus now can mean surprise.

As always we are working hard to return to regular monthly profits soon.

We wish you a happy week ahead!