French Elections – First Round

The much anticipated French elections are finally around the corner and with all of the noise from earlier in the year, looking at the EUR, one would have thought that it was a 2 horse race between the more seasoned, but tainted Fillon and ex-banker Macron.

As things stand, it’s a 4-horse race and there are a range of scenarios to come on Sunday, with the market preference clearly siding with a Fillon and Macron 2nd round.

The polls are not behaving themselves and it’s up for grabs on Sunday, with Melenchon, the Eurosceptic and Le Pen, the anti-EU, anti-EUR, anti-pretty much everything in the running, neck and neck with Macron.

If we were expecting the markets to have buckled at the knees following Brexit, a populist 2nd round victory is likely to be an altogether different proposition, particularly when considering the fact that France is significantly more entrenched in the EU than Britain and of course, there is the Eurozone and a threat of Le Pen returning the French to the Franc, albeit Franc2.

For now the panic has yet to set in, with Macron leading in the polls, albeit a small lead, over Le Pen, the EUR and European equities holding their ground on the penultimate day, but with the elections taking place on Sunday. The risk of a Melenchon – Le Pen 2nd round will need to be a consideration for the markets, a sell-off an almost given come Monday when considering what would lie ahead for the French and the Establishment come May 7th when, not only the fate of France will be sealed, but perhaps that of the Eurozone and the EUR as we know it today.

For the markets to really panic however, both Melenchon and Le Pen will need to be sitting in the 2nd round, the French election process continuing to favour the centralists, whether it will be Macron or Fillon, voters from the losing side unlikely to shift too far to the left or the right.

What’s left for the respective party leaders to do going into Sunday’s election? Very little with candidates not permitted to campaign from midnight on Friday, with the final election polls also likely to be rolled out just before midnight, with election rules banning the release of polls on the day before voting day.

Election booths will open at 8am on Sunday and will close by 8pm in the larger cities and the results will begin to come through from 8pm on Sunday and depending upon how close things get, the markets will know the fate of the EUR and European equities well ahead of the Monday open.

What will the markets do? We can expect the EUR and European equities to bounce in the event of a Fillon – Macron 2nd round with the CAC likely to see a good 5% rally, multi-nationals under the cosh in the event of Le Pen victory.

Le Pen would certainly push the EUR towards parity against the Dollar and perhaps beyond, with even Melenchon less of a risk as far as the EUR is concerned.

It goes without saying that a Fillon-Macron victory on Sunday will provide the EUR with solid support and we would expect the EUR to make a move towards $1.10 levels.

There’s little else to say for now with the markets now likely to be in a holding pattern through today, the only question being whether we can expect a sell-off on Friday, which would certainly make sense considering the risks that lie ahead, the polls having now caught the markets offside on two occasions over the last 12-months.

One thing to consider is that the markets are assuming that voters in the 2nd round will go for the centralist party in the running. Could that be the surprise result come 7th May? Fillon voters preferring a populist vote over Macron?

It will be need to be considered if either Melenchon or Le Pen make it through, however unlikely such an event may be…