In the past two weeks, Bloomberg chat rooms were filled with questions such as: Can anybody remember when was the last time a presidential candidate won >40% of votes in the first round, but lost it in the run-off? Even the most seasoned veterans couldn’t remember such an event. Well, it happened yesterday in Romania. What do we make of it, and how to trade it – find out in this brief research piece.
What was expected to be a razor-tight call ended up with a landslide victory – a reformist and pro-EU candidate, Nicușor Dan, managed to secure victory in the run-off Romanian presidential elections, ahead of first round frontrunner George Simion. After all 20k ballot stations were fully counted, Nicușor Dan received 6.17mm ballots (54%), some 830k more than George Simion, who received 5.34mm (46%). This outcome came on a massive voter turnout – some 64% of close to 18mm Romanians eligible to vote – decided to cast their ballot.
This electoral outcome serves as a breath of fresh air to financial markets, since although expected by the polls, it was certainly not fully discounted by traders of Canary Wharf. After the first round of presidential elections, George Simion managed to secure about 41% of votes, compared to anemic 21% secured by Nicușor Dan. This happened on a much smaller voter turnout (52%, or 9.43mm in absolute terms), so translated back to absolute figures, Simion won some 3.86mm of ballots, compared to Dan’s 1.98mm (link). Clairvoyant observers stated two important impressions: the first of them being that the May 04th ballot represented George Simion’s zenith because everybody who wanted to vote for him already did, while the reformist agenda might still have some silent voters that sat through the first round of voting. Second impression was that Nicușor Dan narrowly beat George Crin Antonescu by a razor-thin margin of merely 80k votes to become a second-round contender, a critical ingredient to Simion’s final defeat since Nicușor Dan managed to secure much more diaspora vote compared to any other moderate candidate, Crin Antonescu included. The Romanian diaspora is heavily concentrated in Moldova, and Moldovan President Maia Sandu was the first among European leaders to congratulate Mr. Dan on his electoral victory.
So, where do we go from here? George Simion is currently using Mr. Trump’s 2020 playbook and claiming that the election was stolen. The financial market and the Romanian constitutional court would treat these accusations as meaningless, and we have no doubt that Mr. Nicușor Dan would eventually take the office of Romanian president. In early morning hours, EURRON dropped from 5.1075 to 5.0450 with more RON appreciation waiting to resurface after the domestic market comes online. It’s worth reminding that EURRON breached the 5.0000 threshold just days after first round election results were disclosed and that some bulge bracket banks cautioned away their clients from Romanian asses at least before EURRON reaches 5.25. Romanian 10Y international bonds breached 7.00% YTM just days after the first round election results were official, and dealers regularly complained about the flow being only one way. The spread widening was unprecedented, and by mid May most of the 10Y segment was trading at 440bps-460bps above the German yield curve.
Romanian & German bond spread comparison
Source: Bloomberg, InterCapital
Spread tightening is definitely in store today, but we would also like to remind our readers to expect another triple tranche ROMANI€ in the days to come. First of all, it was announced by the current government to take place days after the second round of presidential elections, but more importantly, because the Romanian Ministry of Finance is cash-strapped amid political stalemate and stagnating GDP growth. This placement could satisfy local thirst for Romanian assets, although it’s quite likely it would flow at spreads below 400bps to Germany as the risk premium gradually fades. In other words, ROMANI€ definitely has upside, but if you are exiting speculative positions opened ahead of the second round ballot, be aware that the upside is capped and that institutional money is waiting for the pending ROMANI€ placement to get in, not to chase scraps on the secondary market.
