Why the French Election matters to markets

The French election has been a key theme at the forefront of investors minds’ over the last few weeks and last night was no exception as we a saw the first-round vote resulting in Front National candidate Marine Le Pen progressing to the second round to face centrist newcomer Emmanuel Macron.  Le Pen won 21.5% of investors vote and Macron 23.8% with the other two candidates, Francois Fillon and Jean-Luc Mélenchon, being eliminated after capturing just 19% of the vote each. 



There are multiple issues on the mind of the French electorate including high unemployment and sluggish growth, two issues that President Francois Hollande and his predecessor Nicolas Sarkozy have failed to tackle.  More recently, security has re-entered the debate since last Thursday’s killing of a policeman.  The most significant risk to currency markets is that, in-part to address these concerns, Marine Le-Pen advocates a renegotiation of EU membership and restoration of French sovereignty, solutions which would put the single currency project under severe pressure.


Whilst Macron is now favourite to prevail on May 7th, a Le Pen win would result in significant regime change.  There are some serious questions that need to be answered considering that yesterday, over 75% of voters did not vote for Macron.  Will the staunch catholic supporters of Fillon back a liberal, or the staunchly catholic Le Pen?  Will the radical left backers of Mélenchon really see ex-Rothschild banker Macron as a sufficiently-lesser evil to Le Pen to even bother to vote?  Will the French people trust a man who has never held elected office?  As the electorate gets to grips with these I would expect the next two weeks to remain volatile. 


Somewhat surprisingly, markets reacted positively to yesterday’s results considering Le Pen is now left in a two-horse race.  The euro rose 2% against the dollar in Asian trading, driven in part by the removal of a tail risk that Mélenchon could progress alongside Le Pen to the final round.  Although from opposite ends of the political spectrum, Mélenchon shares Le Pen’s anti-EU sentiment, it would not have boded well for the single currency if these were the only two alternatives for the French people on 7th May. 


The election and associated debate remains a bellwether for Europe, highlighting whether the populist nationalistic tide that saw Britain vote to leave the EU and Trump’s election in the United States continuing to rise, or whether we will see a revival in positivity towards the bloc. This is an existential question for the single currency and one which will continue, especially considering 40% of voters yesterday selected candidates that want to leave the EU.  Pollsters and journalists remain confident that Macron will win and, in part, this has contributed to the rise in markets this morning.  However, given events over the last year I would be hesitant to put too much reliance on either of these sources of wisdom. 


The largest downside risk for euro holders will occur if we start to see an increase in the chance of a Le Pen win.  Whilst this event is not currently expected, the downside risk if it happens is significant and more importantly, it appears this risk is being underpriced by commentators.  There are many potential catalysts that could swing the balance in this direction, for example another terrorist attack or another negative revelation about one of the candidates. 


Our forecasts remain unchanged for now as we remain bearish on the euro project and forecast levels of 0.97 against the dollar by the end of this year.  Whilst a strong win by Macron may result in short term stability, this theme will not go away regardless of who prevails on May 7th.  To become long term constructive on the euro we need structural change and greater integration across the Eurozone.  This French election campaign has already demonstrated an active disagreement from the proletariat to move in this direction.



Author: Alexander MacAndrew


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