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The second round of the French Presidential election will take place this Sunday, 7th May, the candidate who will win the keys to the Elysee […]
The second round of the French Presidential election will take place this Sunday, 7th May, the candidate who will win the keys to the Elysee […]
The second round of the French Presidential election will take place this Sunday, 7th May, the candidate who will win the keys to the Elysee Palace should be known by approx. 1900 BST, although the result won’t be confirmed until later, when all of the votes are counted. The polls point to a landslide win for independent candidate Emmanuel Macron, and Oddschecker now puts his chances of winning at nearly 90%.
Why the polls could be right this time
Of course, polls have been wrong before, so some argue that Marine Le Pen could still win on Sunday, however, we feel confident that she will not be able to pull off a last-minute miracle win. When Donald Trump beat Hillary Clinton, the polls had tightened significantly in the lead up to the election, the same happened with Brexit. In contrast, Macron is still miles ahead of Le Pen, the latest polls have Macron winning nearly 60% of the vote, with Marine Le Pen on 40%. A 20 percentage point lead for Macron is much more than a margin of error, suggesting that the polls could have got it right this time.
We will continue to watch the polls closely, and unless we see a significant tightening in the next few days then we will assume Macron will have a comfortable victory on Sunday. The question now is, what does a Macron Presidency mean for the financial markets, and, if Le Pen does pull off the impossible on Sunday, could she cause market panic?
President Macron and the markets:
Overall, we see a win for Macron as having a limited market reaction, as the “good” market news of his victory has been mostly priced in. The biggest risk for the European markets could come from the National Assembly elections in June, where Macron will need his party members to win a significant number of seats to ensure that he can turn his political agenda into a reality. We will cover this in more detail closer to the time.
Figure 1:
Source: City Index and Bloomberg
A surprise win for Le Pen:
Although we consider this a low probability event, if it does happen it could be high risk and cause a sharp drop in risky assets. Although Mme Le Pen has dampened her “Frexit” talk ahead of the second round of voting, we think that if she does become President then she would reignite her desire to take France out of the EU and to abandon the euro. This could spook the markets and cause a large leap in French bond yields. If this happens then we could see sharp falls in European equity indices and a large drop in EUR/USD, potentially back to the 1.0340 lows of the year so far.
A Marine Le Pen victory could have broader implications for the currency bloc, with the potential for a sharp rise in French bond yields to cause contagion elsewhere, particularly Europe’s weaker countries that also have elections coming up including Italy. This could trigger a more sustained global market panic and a significant rise in volatility.
Conclusion:
The market is expecting Macron to cruise to victory on Sunday. Although the polls have been catastrophically wrong in recent years, we think that Macron’s wide lead over Le Pen is more than a margin of error, and is probably a sign that he will be the next President of France.
We expect a limited reaction to a Macron victory, as price action since the first round of the vote suggests that his victory has already been priced in. This is particularly evident in the euro, while European equities have become less sensitive to French political risk post Macron’s victory in the first round.