- Macron and Le Pen win first round French elections
- Market horror scenario of Le Pen- Mélenchon run-off avoided
- Macron still likely to win (easily?) the presidency in second round on May 8
- What will parliamentary elections bring? Which government will be formed?
- Outcome positive for risk sentiment, but lingering (modest) tail risk to stay
- Negative Bund, positive OAT’s and peripherals; positive euro and Euro equities.
The first round of the French presidential elections caused a lot of suspense in recent weeks as four candidates were, according to the polls, in a neck-to-neck race. Their poll differences were smaller than the error margins. Finally, like the polls suggested, Centrist Macron and Right- wing Le Pen qualified for the second round to be held in a fortnight, with likely the pro-European Union centrist Emmanuel Macron becoming president.
For markets, the following issues are important
First, the horror scenario in which right-wing Le-Pen and Left-wing Jean-Luc Mélenchon would go to the second round is avoided. Both threatened to leave the euro of/and EU and both had a radical anti-market programme.
Second, the result suggests, like the polls, that Macro will win the second round and become president. He beat her, as polls had predicted by about 24% to 21.4% (official, though not yet complete vote tally). A snap poll released after the vote suggest Macron will defeat her by a 20%- point margin in the runoff. An anti Le Pen front is already established with the socialist Hamon, former PM Valls, current PM Cazeneuve, Republican candidate Fillon and many other personalities, lining up behind Macron for the second voting round. However, a small residual risk of a Le Pen election win might still be visible in the markets.
Third, even in case of the likely Macron win in the second round , he is an independent without an established party. This means he will have to find partners to establish a government after the June parliamentary elections. This might cause still problems and eventually make him, in an unlikely worst case scenario, a kind of lame duck. The country may de facto be reigned by other parties. Given the election outcome of today, we suspect that ultimately the next government coalition will be centre-right oriented, as the socialists lost heavily. Please note that these elections also occur in two rounds, which favours the Republicans, the biggest party (Fillon).
Market reactions
The result is positive for the risk sentiment and the initial reaction cross markets was strong, but moves have moderated and partially reversed.
In the bond market, it means there is less need for safe havens. So, it is bearish for German (and other core) bonds, while the spreads of French OATs and peripheral bonds will narrow. The Bund is still closed but the T-Note future fell slight less than 1 point on the outcome, but has recouped 8/32 from the lows. The 10-yr OAT-Bund spread already narrowed on Friday, as some positions were squared, to about 68 bps. However, when European bond markets open, more spread narrowing is likely, maybe to about 50 bps in the next days. Only after the parliamentary elections, it will be clear whether France will get a reform and pro- European Union oriented government. That may fade the tail risk completely.
In the FX markets, the event is euro positive and yen negative. EUR/USD jumped immediately to above 1.09 from about 1.0720 in thin far east trading, but has now reverted to 1.0845. The safe haven yen lost ground versus the dollar (and euro of course) up from about 1.09 to a high of 110.65, but also here some retracement to about 110. More detail about the outlook in our Sunrise report.
Asian equities trade mixed with Japan profiting from the weaker yen, but no euphoria in other markets. Initial gains have been largely lost. European equities should do well.
