Marine Le Pen and Emmanuel Macron are now the main contenders to fight in the second-round runoff for the presidency on 7 May 2017, with a high chance of Emmanuel Macron winning the election. Beyond any attempt to analyse the outcome, which is not our raison d’être, we believe markets are pencilling in a lower extremism risk and the subsequent withdrawal of France from the euro zone. Market trends on Monday clearly reflect this: equity markets have surged in France and Europe, the euro has jumped up, the yield spread between French OAT and German Bund has narrowed, and German Bund rates have hiked.
Farewell to extremism risk?
Voters will return to the polls in two weeks’ time. Many events could unfold before then and weigh on the second round, but contrary to Marine Le Pen projections of topping the first round, total votes of 21.4% are much lower than the high point of 26-27% published in the opinion polls early March, lessening her chances of emerging as the victor in the run-off. Opinion polls suggest Emmanuel Macron is now favourite to win on 7 May by a significant margin. Furthermore, François Fillon and the main right-wing party leaders, but also Benoît Hamon and the Socialist Party (PS), have called voters to unite against the Front National and vote for Macron.
A rather accurate prediction by polling organisations
The first round has also shown that the opinion polls now seem well adjusted to changes in French society and politics, with the final score for the main candidates close to overall forecasts. Turnout was high, nearly reaching 2012 numbers, as expected by pollsters.
A moderate impact of politics on markets
In our view, the lower risk premium following election results reflects market relief on the outcome, underlying the fact that the markets had factored in a number of different scenarios and not just a central one. We still strongly believe that, besides concerns on extremism, politics had, in final, only a moderate short and medium-term impact with economic cycles deemed more important. The parliamentary elections in June should not entail a major market event. From then on, a positive economic environment and valuations should be at the forefront of market trends. At least until political risk appears again with elections in Italy slated before March 2018.
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