French election relieves systemic risk

This is a brief update on the status of global systemic risk in the wake of yesterday's French elections. By rejecting extremists, the French have reduced the risk of a Eurozone/euro collapse. 2-yr Eurozone swap spreads and default credit spreads on French debt, both key measures of systemic risk, have declined significantly from their recent highs. Europe is not out of the woods completely, but investors nevertheless are breathing a sigh of relief. Equity markets, understandably, have moved higher as a result.

The chart above shows the price of credit default swaps on French debt (a form of insurance against default by the French government). They reached a high of over 70 bps at the end of February, and are now down to just under 35 bps. This puts them only modestly higher than their multi-year low of 27 bps, which was registered last September. For context, CDS spreads on German debt—perceived to be ultra-safe—are a bit less than 20 bps.

The chart above compares US and eurozone 2-yr swap spreads. At 34 bps, US spreads are at the high end of their "normal" range of 20-35 bps, whereas Eurozone spreads are still somewhat elevated. The worst of the panic seems to have subsided, thanks to yesterday's elections, but concerns linger.

Eurozone stocks are now up 25% from their lows of last summer. US stocks have far outpaced their Eurozone counterparts since 2009, but Eurozone stocks are starting to close the gap, having outpaced US stocks by 7% since last summer. 

As the chart above suggests, the French election outcome was a relatively minor "wall of worry" that, now partially resolved, has allowed stocks to float a bit higher.