Relief rally following the first round of the French presidential election | Mackenzie Investments

Market Commentary

Relief rally following the first round of the French presidential election


Todd Mattina
Todd Mattina
Chief Economist

Global markets rallied on Monday as Emmanuel Macron and Marine Le Pen advanced to the second round of the French presidential election on May 7. Investors were reassured that the worst case scenario of a run-off between the far left and far right candidates was avoided. Today’s relief rally in global markets reflects fading tail risks with a reduced chance of a populist president challenging European cohesion or threatening to take France out of the euro zone.

  Key Points
Election result
  • Emmanuel Macron emerged as the frontrunner with 23.8% of the vote with Marine Le Pen placing second with 21.7%.
  • For the first time in the modern political era, candidates of the two major parties will not advance to the second round.
  • The result is a major failure for political elites, echoing similar defeats for the establishment with the ‘Brexit’ referendum and US presidential election.
Macron’s policies
  • Macron is a 39-year-old political moderate and former investment banker.
  • He supports remaining in the euro zone and the EU, gradual deregulation and pro-business reforms, and cuts in state expenditure and the civil service.
  • Macron also supports reforms for a more flexible labour market.
Le Pen’s policies
  • As leader of the far right, Le Pen has proposed a referendum on exiting the euro zone and printing money to finance an expanded welfare state with tax cuts.
  • Le Pen has also suggested withdrawing from the EU if it could not be reformed.
Market reaction
  • The sharp relief rally surprised some analysts because the first round outcome was in line with the consensus expectation.
  • Going into the election, about 30% of voters were undecided and the top four candidates were in a statistical dead heat, so more adverse scenarios were also discounted in asset prices, such as a run-off between the far left and far right candidates.
  • The euro initially rallied to €1.0937 (up 1.9%), its highest level since the surprise election of Donald Trump in November before fading to about €1.0865 (up 1.3%).
  • French 10-year sovereign bond spreads vs. German bunds narrowed by about 20 basis points, as German rates rose and French yields fell in a reversal of flight-to-safety flows.
  • Global stock markets also surged with the French CAC 40 gaining over 4% and the EuroStoxx 50 gaining about 3.7%.
  • Benchmark equity futures in North American markets rose by about 0.8% to 1%.
Political next steps
  • The outcome delivered a firm message to political elites while avoiding more adverse scenarios, such as ‘Brexit’ in the UK.
  • Public opinion polls taken on Election Day give the odds of a Macron victory in the second round at about 62% to 64%.
  • If elected president, Macron’s main challenge will be advancing his political agenda in a legislature dominated by other political parties.
Expected ECB response
  • The positive market response is unlikely to lead the ECB to taper QE any sooner because underlying inflation pressure in the euro zone remains subdued.
  • At the same time, economic activity indicators, such as the German Ifo index and PMI indexes, point to resilient growth that support a ‘global reflation trade.’

European 10-year Sovereign Bond Spreads vs. German Bunds (in percent)

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Euro Surged With Easing Concerns About Tail Risk Scenarios (euro relative to US dollar)

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