By James Trescothick, Chief Global Strategist.
There I was enjoying a mid-evening refreshment with a good friend of mine as we waited with anticipation the open of the Asian session. With the initial results of the first round of the French elections coming in, we were both expecting some form of relief rally for the Euro pairs as the fear of both Le Pen and the other anti-European Union candidate Melenchon winning the first round had been very real.
But as signs that the popular more calming Macron had indeed won the first round with Len Pen, in seconds the market reacted with relief. The EUR/USD opened with a gap higher of around 170 pips, the EUR/GBP also opened higher initially returning to levels it was trading at before the UK’s announcement of a snap general election for June. However, the real indication that panic was over was the reaction of French and European stocks especially the likes of the EU stocks 50 and the CAC 40 which opened at levels not seen since late 2015.
With Macron winning the first round by 24.01% of the French vote to Le Pen’s 21.3% of the vote, the general consensus is that Macron, a pro-European union candidate will indeed win the 2nd round on the 7th May and all is well. Phew, the European Union is safe.
However, if 2016 has taught us anything it’s that nothing is ever what its seems and we must come to expect the unexpected.
So as we approach the final days of campaigning for the two remaining candidates before France reaches its final decision on who will lead it for the next five years, we must wonder; will the result be as expected or will 2017 take a leaf out of 2016’s book?
For the first time in the recent history of France, none of the mainstream parties have a candidate in the second round. Instead we have an independent and the leader of the far-right national front going head to head and although, according to recent polls, Macron is in the lead, Le Pen has showed signs of making ground up.
Here lies the real battle, the question of; can Marina Le Pen actually convince the populous she should be the chosen one? Now Le Pen does indeed have her supporters and on these final days she does appear to be trying to soften her tone when it comes to her anti- EU views, no doubt in effort to try to gain support of the Fillon voters. Macron has tried to express that although he is not anti-EU, he will be the leader to help reform the EU for the better of France and that he hears the anger of the population of France who are not happy with their current EU membership.
Both candidates are in some ways adjusting their tone, but Le Pen I feel has the tougher task of winning, not because of Macron but because of what actually did happen in 2016 and the aftermath of those two surprising events.
Let’s face it, Trump’s surprise win back in November sent shock waves through the market. However, Trump’s first 100 days in power have been, how can I put it; a pure pantomime of misjudgments and a comedy of errors. Marina Le Pen has often been referred to as France’s Donald Trump as both reduce economics to the simplest terms and promise radical proposals which they believe will make their country’s stronger. It is really due to these similarities and Trump’s first 100 days that Le Pen will not win.
The so called populous vote, which was gaining momentum last year is slowly vanishing as the reality sets in that these outrageous moves like electing a reality TV star /real estate tycoon to the White House, may not bring the change that is required and is in fact even more damaging.
You could also look at the Brexit vote. If the Brexit vote was held today, would the leavers win with all the economic concern for the UK now rising because of it?
They say hindsight is a blessing and it could be that those two key events of last year are now being looked back upon as France decides its fate and may think such a dramatic change might not be the way forward.
So how will the markets react this time around on the 8th May.
A Macron Win
Ok, well we have already seen the market’s reaction on Macron winning the first round. Upon Macron winning the second I would be surprised to see the Euro pairs react in such a dramatic fashion as they did on the 23rd of April, as it is most likely priced in. In fact, we could see a small sell off as traders “buy the rumour, sell the fact”. Stocks however I could see maintaining their current bullish run as both France and the EU relax that everything is safe.
A Le Pen Win
Ok, as I have already said, I very much doubt this will happen but if it does………. Well we could indeed see the same market impact that we did with the Brexit. The Euro will most likely come under extreme selling pressure as the mere existence of the European Union will come into question. In fact, parity with USD could be even possible. Stocks are likely to follow the same direction as there would be real fear gripping the market.
At the end of the day we are going to have to see what May the 7th brings, will it be the relative calm or the storm?