Macron’s Win: Implications for Global Politics and Financial Markets

Paresh Upadhyaya is Director of Currencies, US.

The French elections are now over and did not turn out to be a key risk event that was widely feared for global financial markets. Emmanuel Macron handily won the election with 66.1% of the vote, versus 33.9% for his opponent, Marine Le Pen. The next key election event will be the French Assembly elections that will be held in June. Current polls indicate Macron’s fledgling party, En Marche , will be close to a majority, which will enhance his effectiveness in office. In this summary, I will highlight implications from the French election, the current market reaction and the overall macro/financial market implications.

French Election Implications

1. The polls were accurate, a welcome development following last year’s surprising BREXIT and US Presidential Election results.
2. Could this be a sign that the populist, anti-establishment trend may have run its course? The Dutch election results were in favor of the establishment order and now the French have voted the same way. While it remains too early to come to a definitive conclusion, there does appear to be growing support for this trend.
3. European political risk premia should continue to recede. Next up for the European election schedule are the French Assembly elections that will be held on June 11 and 18. Macron’s win gives his party momentum while potentially deflating morale for Le Pen’s National Front (FN) party. These will be followed by the important German elections that will be held on September 24. The French election results should prevent any momentum for the moribund Alternative for Deutschland party (AfD) against either the ruling CDU-CSU coalition or the key opposition Social Democratic (SPD) party.
4. There was evidence of Russian involvement in the French election. According to the Eurasia Group analysis, “Russia is eager to show off its capabilities, sowing dissent for an anti-Russian player, building concern about the legitimacy of the electoral process, and building long-term opposition against a pro-Europe political establishment.”

Financial Market Reaction

Macron’s win elicited a proverbial “buy the rumor, sell the fact response in the financial markets.” To put it another way, Macron’s win was priced into the market. There was profit taking in the French equity market (CAC), which declined 1.0% this morning after rising 2.7% since May 4th, as risks of an upset Le Pen victory receded dramatically. The euro briefly broke the psychological level of 1.10 but has since sold off nearly 0.5% to 1.0950. Finally, the German bund-French government bond (OAT) spread was largely unchanged at -41basis points (bps) – its narrowest spread in three months.

Key Macro/Financial Market Implications
We believe there are a few global financial market implications from the French
election.

1. European equities should continue to outperform against the S&P 500 Index
   as political risk premia continues to dissipate. In particular, Euroland
   peripheral stocks should outperform against European core markets
   (German, Benelux).
2. No contagion from the election result should keep the US Federal Reserve on course to hike policy by another 25 bps in June. Currently, markets are pricing in a 100% probability of a hike.
3. Risky assets should perform well, as the favorable global growth outlook
   and positive financial conditions continue to remain supportive.
4. The outlook for the euro has turned positive now that politics will be less of
   a headwind. This could prompt the European Central Bank (ECB) to pivot to
   a slightly hawkish stance and should support a euro between 1.10-1.15 in
   the coming months.
5. Finally, global yields should rise, as European yields move higher, taking
   their cue from a more hawkish ECB as politics will no longer be a deterrent.
   US Treasuries should move back to their prior range of 2.30-2.60.