Daily Management Review

More Than One Scary Outcome For Markets Is Presented By The French Election


04/19/2017




More Than One Scary Outcome For Markets Is Presented By The French Election
Depending on which candidates make it to the final leg of the race, the first round of French presidential election on Sunday could bring on intense market volatility as it is a major test for euro zone unity.
 
Since the U.K. voted to leave the European Union last June, French stocks recovered from the worst intraday selloff but it closed down 1.6 percent on Tuesday. By piling into safe haven assets like U.S. Treasurys and gold, and buying yen against the euro, investors globally have been hedging ahead of the vote.
 
"I think it's potentially huge, or it could be nothing, and we'll know that Sunday night before the market opens," said Andrew Brenner, global head of emerging market fixed income at National Alliance. A signal of market unease is the continuing widening of the spread between French and German 10-year bonds, he said.
 
The future of the entire euro zone could be threatened because far-right National Front candidate, Marine Le Pen has run on a platform to divorce France from the euro and this could happen if she wins and this is the big fear. As it stands now, centrist Emmanuel Macron, a former economy minister or conservative Francois Fillon or far-left candidate Jean-Luc Melenchon could be the competitor for Le Pen after the first round.
 
"It is true that four candidates are coming all within a margin of error. It is impossible to know for sure whether the French electorate will look at these polls and decide to vote with their hearts or get excited by the underdogs," said Charles Lichfield, associate, Europe at Eurasia Group. "Something we can say is Mrs. Le Pen is most likely of those four candidates to make the second round. They're all between 18 and 22 percent. Ninety percent of Mrs. Le Pen's 22 percent will vote for her."
 
Macron is expected to beat Le Pen in the final vote and is the candidate favored by markets. "If it appears Macron is in the race, all of this goes away for the near term," said Brenner.
 
Melenchon also stands a chance to win, Lichfield said. He would be considered a disruptive candidate like Le Pen. Individuals who earn 400,000 euros ($430,000) or more would be taxed rate of 100 percent by him a fan of Venezuela's Hugo Chavez. He would also seek to leave the EU if his attempts to renegotiate France's relationship with the European Union fails.
 
"Depending on how high [Le Pen] is, the market could react quite violently. If her runner-up is 6, 7 points behind her, many people would see that it's possible she wins," Lichfield said. The runoff election is set for May 7.
 
"You hear people saying if Le Pen gets elected, France pulls out of the euro and the EU collapses. That's utter nonsense. For France to pull out, there has to be a vote of Parliament and they're overwhelmingly against leaving the euro," said Robert Sinche, chief global strategist at Amherst Pierpont.
 
In fact, what could be the more important election is a parliamentary election in June. Not much in the way of inroads is being seen to be made by Le Pen's far-right National Front.
 
"I still expect Macron and Le Pen to be in the runoffs," said Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman. "A lot of people think the French election is about the presidential election. It's also about the parliamentary election in June. The president is a figurehead. The problem is none of the candidates have a strong parliamentary presence. The key to the outcome is going to be the parliamentary elections. Political risk is going to subside, but it can't go away."
 
(Source:www.cnbc.com) 






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