By Jasper Lawler, Senior Market Analyst

The latest polls showing Emmanuel Macron keeping his lead has kept French election nerves at bay. The sense that Marine Le Pen’s success will end at the second round in May dissuaded investors from panicking about any impact the shooting of a policeman in Paris could have on the first round of voting on Sunday.
   
The Donald confidently tweeted that the shooting “Will have a big effect” but only modest moves in the euro and French stocks on Friday suggest markets think differently. It is worth noting that market optimism isn’t without some protection. The implied volatility for the euro is very lofty by usual standards.   Another strong showing from French banks BNP Paribas and Societe Generale offset losses in other sectors head of a strong of bank earnings next week.
No drama on the FTSE
UK stocks were stable on Friday after data showing a consumer spending slump in March dented the case for more Sterling strength. The FTSE 100 spent the last two days of the week oscillating around the 7000 mark. British investors are tossing up the outlook for corporate earnings against the rising possibility of a stronger Sterling.
   
Sky shares were little changed on the news the enquiry on its takeover by Twenty-First Century Fox would be pushed back by a month to June 20. Reckitt Benckiser shares dropped after reporting flat sales in the first quarter. On the FTSE 250, shares of Sports Direct dropped on the announcement of its expansion into the US.
   
Mixed open in the US
It was a mixed open in the US with the Dow up and the S&P slightly lower. Investors are preparing for a weekend of potential political upset and an onslaught of corporate results next week.
   
Tesla shares dropped on news the company was recalling 53,000 cars for faulty breaks. So far CEO and founder Elon Musk seems to have been successful at selling investors the dream of electric car market domination. But at some point technical failures such as those experienced with the autopilot feature or brakes, or missed delivery targets are going to weigh on the enthusiasm. 
   
Retail sales: Seven years bad luck
The British pound slipped after data released on Friday showed UK retail sales saw the biggest quarterly drop in seven years. The fall in sales happening at the same time as prices are rising is a combination not lost on market participants.
   
Sterling was able to bounce off lows of the day thanks to some hawkish comments from Bank of England rate-setter Saunders. Saunders said slack in the UK labour market is probably limited and that the BOE needn’t wait for Brexit uncertainty to change rates. The question is how much markets were baking in political instability versus economic difficulties when the pound was pummeled after Brexit.

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How does the French election work?

Voters pick the French head of state every five years and (like Britain’s EU referendum) it’s a ‘popular’ vote - so every vote counts.

There are 11 candidates this time, which doesn’t include President Francois Hollande who is the first sitting president not to seek a 2nd term for the first time in modern French history.

There are two rounds to the French presidential election. This is similar to the US presidential election which has primaries and then one national run-off between the remaining candidates.

  • 1st round – April 23rd
  • 2nd round – May 7th


One candidate could win more than 50% of the vote in the first round and win the election. The typically large number of candidates makes this unlikely and it always goes to the second round.

The two candidates who receive the most votes in the first round progress to the second round. The candidate who wins the second round will become President.

Polling stations close between 7pm and 8pm in France (CET) and the result usually becomes clear before midnight. Between 9pm CET (when markets open) and 12pm (when the result should be clear) on Sunday is when forex markets, particularly EUR pairs, are likely to be most active.

The inauguration typically takes place about 10 days after the election result and the president will take office before the parliament is elected.

Why is the French presidency important?

Brexit, the election of Donald Trump and the rise of nationalist candidates like Geert Wilders in the Netherlands and Marine Le Pen in France are part of a populist wave moving through the Western world. Populism is a reaction against globalisation and an uneven distribution of income - and a threat to the current world order.

The success or failure of populist candidates in Europe could play a significant role in the direction of global stock, bond and currency markets this year and beyond.

Nationalist candidate Marine Le Pen has promised to hold a referendum to take France out of the Eurozone and return to the French franc. France is one of the founding members of the euro, as well the second largest Eurozone economy after Germany. A French exit would almost definitely spell the end of the euro as we know it.

If Marine Le Pen were elected, her power to dictate a euro referendum will depend on the result of parliamentary elections two months later. There are two rounds of elections to select the National Assembly (the lower chamber of France’s parliament) on June 11 and June 18.

In a scenario in which Marine Le Pen wins the Presidency and then her party The National Front wins a majority in the parliamentary elections, a euro referendum is very likely. It would be plausible to see EUR/USD drop to parity. If the opposition gets a majority it would create a so-called cohabitation and make a referendum less likely.

How could markets be impacted by the first round?

  • LCG markets to watch:
  • EUR/USD
  • EURGBP
  • EUR/JPY
  • France 40
  • French shares
  • Bund
  • Gold


Aggregated polls published by Bloomberg show the top four candidates neck and neck. Emmanuel Macron is a narrow favourite with Marine Le Pen closely behind.

Francois Fillon sits in third place, having recovered slightly following the scandal that he paid his wife a parliamentary salary when reportedly she did little-to-no work. The surprise rise of the far-left candidate, Jean-Luc Mélenchon, places him in the fourth position.

Broadly speaking, a Le Pen presidency is expected to be bearish for the euro as well as French stocks (including the France 40 index), likely meaning a higher yield on French government debt. As a former investment banker and economy minister, Macron is the market favourite and would likely see the opposite reaction in markets to a Le Pen win.

Polling in recent elections has been notoriously unreliable so the game is on for the four main candidates.

There is scope for upset in the first round, but Marine Le Pen seems likely to ride the wave of populism into the second round. Big banks even held strategy meetings with the anti-European candidate to prepare themselves for possible Le Pen rule.

The general consensus is that the candidate who would play against Marine Le Pen has circa 60% chances of paving his way to the Elysée Palace.

It is widely expected for Le Pen to win through to the second round so if she does, the market reaction will probably be muted. The bigger opportunity could be if Le Pen unexpectedly falls out of the race early, causing a spike in the euro. In case of Le Pen-Fillon or Le Pen-Macron outcome, there is scope for a relief rally in the euro and the European shares on Monday.

Fillon’s return to form and Mélenchon’s surprise late rise has weighed on Emmanuel Macron’s chances of reaching the second round. Still, given that Macron is polling the best, it seems likely to be a Le Pen-Macron run-off.

The most bearish scenario for the markets would be a Le Pen – Mélenchon finale. This latter option is given low probability, yet if realised, would likely place EUR currency pairs under fundamental selling pressure.

A big surprise would be a duel between Francois Fillon and Emmanuel Macron. The latter is the most uncertain outcome for the second round so could cause an increase in euro, bond and stock market volatility.


The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.


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