French election market salutes Macrons expected easy path to the Elysee Palace

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By :  ,  Financial Analyst

The early exit polls from the first round of the French elections suggest that Emmanuel Macron and Marine Le Pen will progress into the second round. The latest Kantor exit poll (as reported by the BBC) has Macron with 23%, while Le Pen won 22% of the vote, Fillon and Melenchon eliminated at the first poll. The initial reaction has been a surge in the euro, which is already up nearly 2%, above 1.0900, a 5-month high.

France’s “Obama” boosts markets

This was the expected result, as predicted by the pollsters who were correct (for once!), thus one could assume that the market reaction has already been pried in and any further upside could be short-lived. However, the market reaction could be stronger than expected as investors’ begin to price in an easy win for Macron in the second round, and we could see EUR/USD rise to 1.12, the high from before the US election last year. Tonight’s result is market positive for a few reasons: firstly, Macron is a politically stable, centrist candidate, almost like France’s Obama. Even though he would be France’s youngest ever President with no party behind him, he is considered a safe pair of hands. Secondly, it helps to solidify the future of the EU and the euro, something that Marine Le Pen wants to destroy. At the start of a new week the euro is surging, and we expect a large gap higher in the Dax and Cac 40, we could also see French bond yields fall on Monday, once this result is confirmed.

Second round: Anyone but Le Pen…

So, why are Marine Le Pen’s chances of winning the keys to the Elysee Palace so weak, after she polled decently in the first round? The reason is that she failed to win the 30% of the vote that was considered a threshold for her to stand a chance to win the second round in two weeks’ time. In contrast, Macron’s chances of winning the second round are much higher even though his victory over Le Pen was fairly narrow tonight. One reason for this anomaly is that Macron is hovering up support from the eliminated candidates including Hamon and Fillon, who have chosen to back the independent candidate rather than the controversial Far Right Le Pen.

It is worth watching who Melenchon decides to back, as his economic policies are far closer to Le Pen’s rather than Macron’s and he is expected to poll a decent 18% of the vote in the first round. However, the fact that Le Pen didn’t get above the 30% threshold may sway Melenchon (he has yet to announce who he will back), as it may not be popular for him to back her in the key second round. If Macron can secure Melenchon’s backing then this would put him on a solid footing for victory in the second round.

Why European stocks could outperform the euro on the back of this result

As we have said in the past, Le Pen essentially threatens the existence of the EU and the organisational system of an entire continent. Thus, if she is unlikely to win the second round, then we could see some further upside for the euro. However, the impact could be short-lived, especially since the ECB is expected to maintain policy and its forward guidance to commit to QE until at least the end of 2017 when it meets on Thursday, which could restrain euro gains. In contrast, the reaction in the stock market could be much larger. Bank of America Merill Lynch released an investor survey last week that found investors’ bullish on the outlook for European stocks, which they believe to be undervalued compared to US stocks. Thus, if Macron looks like a shoe-in for the Elysee Palace in two weeks’ time this could reduce political uncertainty across the entire EU, and we could see money pile into European equities at the start of a new week.

Related tags: French elections

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