Whatever happens in the first round on April 23 and the second round run-off between the two leading candidates on May 7, the outcome will be binary. A Le Pen victory will be viewed as market unfriendly despite likely limitations to her presidential powers. Fillon or Macron are seen as market friendly results.
The euro would bear most of the brunt of a Le Pen win, with EUR/USD easily going to parity (and possibly beyond). French equity indices could be less affected given their global exposure. French government bond spreads should significantly widen, in-turn affecting peripheral European countries, with Italy, struggling under the weight of a banking crisis and leadership vacuum, particularly vulnerable. This would de-rail the ECB’s quantitative easing ‘trimming’ strategy to cut the level of monthly bond purchases but remain in the market, potentially hastening the scrapping of the capital key.
Fillon or Macron wins should spur both French and wider European assets as political risk premium declines. Bond spreads and the euro are expected to be the biggest beneficiaries: French OAT spreads over German bunds will tighten and the euro will gain, particularly against the dollar and yen.
Base case: Fillon or Macron
Macron received a boost following allegations that Fillon may have misused public funds and centrist François Bayrou’s decision to withdraw from the race and throw his weight behind Macron. Fillon should not be counted out yet though; he gave a robust defence of the accusations against and still commands majority support of Republican-leaning voters. Recent surveys show that Fillon and Macron have been within the margin of error for second place in the first round.
Macron’s party apparatus is nascent, but he has insisted that he will field a candidate for every one of the 577 seats in the National Assembly elections on June 11 and 18. A three-way split in the parliament between Socialists, Republicans and En Marche! could pose a hurdle to the legislative agenda of whichever candidate next assumes office.
Could polls be wrong?
Polls show that both Macron and Fillon have a large lead over Le Pen in run-off scenarios. The two-round system is a considerable hurdle for Le Pen. French presidential run-offs have high turnouts, traditionally around 80%, which favours the median voter’s candidate and makes it unlikely that Le Pen will see a late surge of historically inactive voters. This all reduces the probability of polling biases and unexpected outcomes as in the case of US presidential elections and the Brexit referendum.
If Le Pen wins, what are the chances of a ‘Frexit’ referendum?
Le Pen’s ability to initiate a ‘Frexit’ vote partly depends on FN’s performance in the June parliamentary elections. Without a majority in parliament, Le Pen will struggle to pass much of her agenda.
Either way, it is important to note the most recent European Commission’s Eurobarometer survey found 68% support the euro versus 28% against (Source: Eurobarmoter, November 2016).
A Le Pen market
If Le Pen wins with a minority in the National Assembly, political impasse and related policy uncertainty would almost certainly undermine the outlook for growth and inflation. For markets, the ambiguity of the two weeks between the presidential elections rounds could prompt dramatic sell offs in European asset prices. A Le Pen win would hit the euro and French bond spreads hardest, while French equities would be more insulated. However, there is no need to ‘panique’ just yet as the chances are that Le Pen will fall at the second hurdle.
Anna Stupnytska is global economist at Fidelity International