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Flows and France: big market questions this week

Here are the questions the FT Markets team will be pondering this week:

What do retail flows mean?

Money flows are widely watched but, like anything in markets, there is signal and then there is noise. Investors poured money into global stock funds last week, one when US stock markets set fresh records, and US long-only equity funds received the first net inflow of cash ($0.5bn) in a year, according to Bank of America Merrill Lynch. 

So reason to think the long rise for US stocks will continue, or is it time to head in the opposite direction to capitulating investors? Over in the market for investment grade corporate bonds a longstanding fear that losses might prompt savers to flee continues to look like paranoia, with inflows of $37bn in four months, according to BoAML, during a period when higher interest rates have prompted a 3 per cent drop in prices.


France is not a worry, right? 

French investors continue to tell the FT they are relaxed about the chance of a victory for the far-right National Front, thanks to the country’s two-stage voting system. Marine Le Pen may have worked to remove overt racism from the party’s public image, but memories of her father’s leadership are long and the assumption is more than half of French voters will reject her candidacy were she to reach the May run-off vote.

So pricing of double-A French government bonds in a similar way to those of Ireland (single-A at best), may reflect concerns about changes to government tax and spending plans under a new government, and the coming end to central bank bond buying. 

Still, those further afield do seem to be nervous that support for a flawed alternative to Le Pen could ebb, much as a lack of enthusiasm for Hillary Clinton combined with an expectation she would win may have kept key US voters at home in November. François Fillon, candidate of the right, is hobbled by scandal, while the independent centrist Macron is untested, and the ex-banker may be vulnerable to an anti-elitist campaign. Mujtaba Rahman of the Eurasia Group said “the growing vulnerabilities of Le Pen’s most likely opponents in the second-round runoff mean that the risk of a Le Pen victory is higher than it was a month ago.”

What will happen to Co-op bonds?

Co-op, the lossmaking UK bank, put itself up for sale last week, but another restructuring of the institution’s debts seems possible. Analysts at JPMorgan expect a liability management exercise — a process where debt is exchanged for equity and other bonds to raise capital: “we now take a re-run of the 2013 debt restructuring sometime during the current year as our base case”, they said.

Subordinated bonds trade at highly distressed prices, just over 50 pence on the pound, while £400m of senior bonds, which are in theory safer but could still be exposed to losses, are trading at 86 pence on the pound. Moody’s last week downgraded these bonds, and estimated bondholders could take losses of 35 per cent to 65 per cent if the bank fails. The bonds mature this September.

Bonds prices then are likely to be a highly sensitive indicator of the chance a buyer shows up and, if not, get ready for a case study in bank debt wrangling which may involve converting senior debt to an instrument that meets new European wide requirements for loss absorbing bonds.

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