LONDON (Reuters] – Suddenly, traders find themselves confronted by the possibility that Marine Le Pen will win the French presidency elections against incumbent Emmanuel Macron. They are now scrambling for ways to hedge their portfolios against market turmoil.

Although a Le Pen victory is still possible, it is within the margin of error for Sunday’s first round. According to opinion polls. Although she is no longer advocating ditching euro, the markets remain uneasy over her plans for protectionism, tax reductions, and nationalization.

Berenberg analysts now give a 30% chance of Le Pen winning, compared to 10% before. She would be unable to reverse European integration but further progress will likely stall.

Between 1800-2500 GMT, exit polls for the first round will become available. On April 20, there will be a live televised discussion and on April 24, there will be another round.

Here are some examples of how different assets might react, and what traders do to protect themselves against the downsides.

EURO PAINS

A Le Pen win in the first round could send the euro, currently around $1.09, down to $1.05, but if she won the presidency and also the June legislative elections, the euro could fall below parity to the dollar, Nomura analysts warned.

They said demand for FX hedges was adding to pressure.

In derivative markets, the trend in risk reversals (or the ratio of calls to puts) over the period of one week that covered the first round has been strongly in favour of options contracts and put orders expecting further euro weakness.

Data from Refinitiv shows that investors purchased put options on euro/dollar at levels between $1.07 and $1.08 in the recent days. One trader claimed it’s now 10% cheaper than last week, to purchase a euro put for $1.08.

Nomura suggests buying put spreads that expire in one month, as this covers both polling dates.

The gauge of expected swings in euro implied volatility has also been higher than other FX gauges. Three-week peak in implied volatility of euro/dollar for one week.

“The rise in the French election risk premium could weigh on the euro until the second round on 24 April,” said Samy Chaar, chief economist at Lombard Odier in Geneva.

SALAD WITH OATS

The spread between 10-year French government bonds and German ones — which is essentially the risk premium for French debt — has increased to 54 basis points in bond markets. This level was not seen since 2020’s market crash.

Although spreads have fallen to levels not seen during the 2017 “Frexit” worries, banks claim that clients are more cautious about French risks.

Peter McCallum, Mizuho’s rates strategist, noted that there was spillover from French bonds futures to Italy. Investors hedge their bond exposure by investing in liquid futures markets.

During this week’s saleoff, Italian bonds outperformed French bonds by a significant margin.

While open interest rose, prices for futures on French and Italian bonds have declined. Rohan Khanna (UBS strategist) said that it is indicative of a buildup of short-term positions.

Khanna stated, “I believe there is appreciation for the fact that Le Pen victory it an EU-level question.”

Given the vulnerability of the Italian system, Italian bonds are “your principal instrument to reduce”

NATIONALISATION TARGETS AVAILABLE

Societe Generale (OTC) has estimated that a Le Pen victory would result in a drawdown of up to 8% for French stocks. However, they found that small and mid-cap businesses were at higher risk than Paris-exposed benchmarks.

They also said that European stocks and banks with a wider reach would face additional downsides, as they are highly vulnerable to EU integration.

The traders however reported very little equity hedge activity. Instead, the choice appears to be to either sell bank stocks or holders of motorway concessions such as Eiffage and Vinci. This could be a target for Le Pen’s nationalization.

One trader said that a chill had fallen on French dealmaking activities. He stated, “None of my contacts have mentioned anything for several weeks.”