The Real Loser in the French Election? Austerity

George Kavanagh | Stone | Getty Images

Good and bad news for U.S. equities today.

Here's the bad news: It doesn't matter who the next French president is, the population has rejected austerity. That's the real loser in the French election: austerity.

Here's a rough breakdown of the French elections:

François Hollande (center-left) 28.4%
Nicolas Sarkozy (center-right) 25.5%
Marine Le Pen (far right) 20%
Jean-Luc Melenchon (far left) 11.7%
François Bayrou (centrist) 8.5%

Everyone here except Sarkozy and Bayrou is against the austerity programs envisioned by the European Union. The French don't want their social model tinkered with.

That's why the markets there are so weak today: If the Socialist candidate, Hollande, indeed wins in the runoff, he will not advance any type of austerity (tighter budgets, labor reform) that the market wants. He will only do so when the markets are falling apart and he has no choice. He will then act, disappointing the very people who elected him.

The problem, of course, is that the French people don't want to do what they have to do.

Here's the good news: no panic here in the U.S.

Stocks are down, but off their lows. No big volume selloff, no aggressive selling. Market off lows after 10 a.m. ET, as it usually is.

And the CBOE Volatility Index? It's up, but don't pay any attention to the "spot" index, up about 11 percent and briefly over 20. Look at the VIX futures out several months, and you'll see they have barely changed.

VIX% change today (rounded off)

Spot 11%
May 5%
June 3%
August 2%
October 2%
December 2%

There is a weekend effect on the VIX; it is usually up on Monday. That's because the VIX prices implied volatility 30 calendar days out, so on Friday there's two days ahead with no trading. Hence, lower VIX.

If there was a real panic effect, June would be up a lot more than, say, October, but that is not happening.

So if Europe was so important, why isn't there a bigger concern here? Some are arguing that Sarkozy's chances now are better than a week ago, because the far right candidates did better than expected, and that might help Sarkozy's chances in the runoff.

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