The French presidential elections are in the spotlight the coming week. Four candidates were fighting for the presidential seat – the far right Marine Le Pen, the independent Emmanuel Macron, the left-leaning Jean-Luc Melenchon and the centrist Francois Fillon. The victory of any of these candidates determine a different future for France. The sure thing is, an eventual victory of Le Pen would put the euro under enormous pressure. With her campaign built on an anti-euro tone, threatening that she would trigger a Frexit (France leaving the EU and Eurozone), the implications on markets would be hard in case of her victory.
Le Pen vs. Macron: What-if Scenarios of French Presidential Elections.
The first round was held on the 23th of March, with the independent Macron and Le Pen entering the second round of elections on May 7th. In the first round, Macron gained 23.7 percent of votes, while Le Pen got 21.7 percent.
Following the results of the first round, markets reacted in shooting the euro to a five-month high against the dollar in Asian trading on March 23. The currency gained 2 percent on that day, hitting $1.0939 in early trading. EUR/GBP also rose 1.5% to .85 pence per euro. The market is confident that Macron will easily win against Le Pen on May 7th, with voices took over from Mr Melenchon as leftwing voters are committed to prevent Le Pen from gaining power.
“Now that the initial adjustment higher has taken place, we do not expect the French elections to have much further impact on the euro in the near-term,” said Lee Hardman, currency analyst at MUFG. “The market’s focus will begin to shift away from political risk in Europe and more on to the improving economic fundamentals, which should begin to offer the euro more support.”
However, let’s take a look at some what-if scenarios.
What if Macron wins?
Although the market has already priced-in the expected win of Macron in the first round, a definite victory in the final round would push the optimism even higher, continuing a risk-on investment environment. The percentage difference in the final round on May 7th will also have an impact on the market sentiment. If Macron wins with a substantial margin, the euro could hit and stabilize at the $1.10 mark, a level not seen since November 2016.
Macron’s result, joined with his pro-European tone, increased the confidence in the single currency, which opened with a gap on Sunday evening following the exit polls. Increased cashflows in the European equity market will eventually create additional support for the euro. The benchmark index of the French stock-market, CAC40, already had its best trading day since beginning 2015, gaining 4.1% after the first election round, just like the Eurostoxx financial index which tracks European financial stocks. The Eurostoxx gained 7.2% that Sunday evening – best in 16 months.
French bonds will also become an increasingly popular investment instrument with Macron’s victory. The premium over German Bunds already narrowed to multi-month low. Currently the yield of a French 10-year bond is 0.84, compared to 0.32 of a German 10-year Bund.
Gold and silver could also react to Macron as the new French president. After the first round of elections, gold traded at $1265 when the markets opened on Sunday evening, April 23th. The price fell by 30$ that day, and could continue falling with easing market tensions.
What if Le Pen wins?
This scenario is less likely.
The market is confident that Macron will make the race against Le Pen in the second round. But which impact would an eventual victory of Le Pen have? Let’s make a comparison to Brexit.
Following the vote of the United Kingdom leaving the EU, sterling had its biggest drop in recent currency’s history, gold gained and UK’s and European equities fell. Even US stocks felt the impact of Brexit, with a drop of 3.6%.
The British pound fell 11% on that single day, its lowest level since the eighties.Markets didn’tanticipate the UK would vote on leaving the EU, and were surprised by the results. An analogy could be made with the eventual victory of Le Pen. With France leaving the EU, the block would be gravitating around Germany and would eventually disintegrate together with the single currency. The EU and Eurozone couldn’t survive a Frexit. In this regard, the impact on the markets can’t be foreseen. It would for sure send shockwaves through the markets.
A possible outcome is the euro plummeting first to dollar parity, and then to an all-time low of $0.82, as investors start a sell-off of European equities and the single currency and leave the Eurozone all together, waiting for political reactions to the future of the European Union. All eyes will be on Germany in this case.
Le Pen would likely introduce the “New French franc” after leaving the Eurozone, which would highly depreciate shortly after the introduction.
The yield of French 10-Year bonds would dramatically increase, as cautious investors stay away from the European bond market which enters a risk-off investment environment. Gold will be the winner, with the price of the commodity benefiting from the new market conditions. European equity market would also be hit hard, especially stocks of financial companies. With all mentioned implications of an eventual victory of Le Pen, Europe would enter an economic depression of much greater extent than the 2008 recession and the Greek sovereign debt crisis.
Jim Cramer, host of “Mad Money”, advised investors not to panic ahead of the French presidential elections. “Selling because of European politics has been a mistake endlessly,” Cramer insisted, stressing that recent Brexit sell-offs were largely caused by the trading of hedge funds. “No one ever made a dime panicking. But loads of money’s been made taking the other side of the panic”, he also added.
Conclusion
France is at an important crossroad, determining its own future next Sunday. The directions couldn’t be more different – going right with Le Pen, or left with Macron. Political fears are still present in the markets, as the EU has already been wrong two times – first with the Brexit, second with Donald Trump entering the White House. The single currency wouldn’t survive a Frexit. Italy would probably be following France with the introduction of the lira.
For sure, these scenarios are hard to imagine for the EU founders – that populism and nationalism would destroy a project built over decades, with the sole purpose of the EU to conquer these same forces. Macron’s victory would ease the political fears inside the markets. With the EU economy showing signs of recovery in recent months, and market optimism going up, investments would pick up again. This would create solid support for the near future.