Don’t bank on a relief rally in the euro area anytime soon...

"Le Pen’s momentum is a slow-moving reaction against the men of Davos - as we have seen with Brexit and Trump - but markets don’t want to believe it."

That’s the conclusion drawn by Charles Gave, founder of Hong-Kong based asset-allocation consultancy GaveKal Research, who, as Bloomberg reports, predicted the triumph of Donald Trump in the U.S. election, and is now betting on a win for the anti-euro National Front candidate.

Markets are underpricing the prospect of Marine Le Pen emerging victorious in the French election as a sea of undecided voters throws into sharp relief pronounced apathy for center-leftist Emmanuel Macron -- the front-runner by a whisker -- and the backlash against the European Union project.

Given the prospect of a Le Pen victory, Bloomberg adds that Gave, who has been researching tactical asset allocation for more than 40 years, is advising clients to adopt long positioning in the pound as the U.K. would benefit from haven bids, and shorts on inflation-linked German bonds amid the risk of deflation in the euro area.

“The market is talking about the nightmare scenario but it’s not pricing it in” said Mark Tinker, head of AXA Framlington Asia. Tinker’s a GaveKal client, and admirer of Gave’s tail-risk warnings over the past year. “After Sunday, we will have more information to make a considered risk-return wager to trade and hedge, but high-quality European companies and German bonds look like an attractive bet,” Tinker said.

The stars, however, appear to be aligning for the National Front candidate, said Gave. The fact two candidates for the runoff are likely to be determined by voters who have yet to make up their minds -- as many as 40 percent -- is a bad omen for the centrist contender, he said.

At least half of the far-left and half of the center-right won’t vote for Macron in the second round if he is pitted against Le Pen, believing he is“tainted” by his association with Francois Hollande’s government, and would rather abstain, Gave said. Supporters of Francois Fillon, a center-right candidate whose momentum has been curtailed by graft charges, and a sizable chunk of Macron’s followers would probably rally to Le Pen’s cause if she were to face leftist Jean-Luc Mélenchon in the final round, according to Gave. He sees only Fillon with a chance to defeat Le Pen in the run-off.

The odds are very different...

But Gave offers an ominous vision of what happens next...