French first round elections: euro to remain bid on expected outcomes?

It’s the first round of the French Presidential elections this weekend, (23 April). 

While it is just the first round, from a market perspective, in fact, this could be more of a compelling event than the second as it is the first round that will give us the most information as to who will be France’s next President. Currently, the market's price action is telling us that should the leading candidates in the polls get through as predicted the euro is likely to remain firm in the absence of a surprise. 

While Le Pen is anti-euro and EU, she will still most likely hold a referendum should she win the presidential and parliamentary elections. Bizarrely, that means a potentially softer landing for the euro in the near term than anything else, something Martin Armstrong explained in the "French Elections Panel" that can be viewed in the video below.

As the polls stand currently, it is a four-horse race still with Macron leading 24% vs Le Pen's 22.5%, Fillon 19.5% and Melenchon 19%. A first round outcome as this should enable the euro to drift higher. However, should a combination Le Pen and, say, Mélenchon, come out on top, this could be a big upset for European stocks, bonds and the euro.  

Note: (Jean-Luc Mélenchon from Unsubmissive France is considering a Frexit if EU treaties renegotiations would fail - so either Le Pen of Mélenchon making it to the second round is a catalyst for German/France spreads and the downside in the euro and a significant risk to the EU and EMU/EZ project as a whole).

Should Le Pen win the first round, that will put her in good stead for round two but may not necessarily mean the euro will fall with velocity beyond the normal market scope, not at least anything like the pound's flash moves since the Brexit vote, although round one is perhaps a riskier play than round two.   

A good read was from analysts at Nomura on this came from Nomura: "Like Brexit and Trump, it’s the vol markets that provide the clearest picture of “what’s priced in” and until this week it had mostly been the second round (7 May) that received the market focus. 

Jean-Luc Mélenchon has seen such a rise in support that it is now a true four-way race. It may not be perfect but if you take the odds of either a Le Pen or Mélenchon victory, then the combined chance of either candidate winning is 36%. 

This number surpasses the probability assigned to both Trump and Brexit at this stage. This suggests EUR vols for the first round may not be so expensive. The gaps between candidates in the first round are close to the margins of error, while in the second they are far apart and in the “safe zone” polling numbers. So the market may switch to pricing in the second round outcome quicker than you’d think. As first round implied overnight vol is not yet at Brexit/Trump levels, it encourages us to think there may be higher market pricing to come. If either Mélenchon or Le Pen wins in the second round we expect a much lower EUR but it may go too far, but given the hurdles to an actual “Frexit”, there may also be a “fade trade”." - Nomura 

So what are the big ideas to reinvigorate the French economy? Let's look at the candidate manifestos:

1) Emmanuel Macron (Centralist) leading in the polls for both R1 and R2, more the status quo for markets, than Le Pen/Melenchon victories

  • Cut public spending by EUR60b - How? Slashing 120k jobs 
  • Invest EUR50b in training youths that are unemployed
  • Boost business with sweeping tax cuts for corporates and housing

2) Marine Le Pen (Front National & Far Right), closing in on Macron in the polls

  • Leave EZ (Frexit) 
  • Return to national currency
  • Platform focusses on immigration
  • Higher taxes on foreign workers than domestic
  • tax on imports
  • spend less on EU immigration matters by - EUR60b

3) Jean-Luc Melenchon (Far left), markets concerned that he too is in the race (up from joint last with Fillon)

  • Wants wealthy to pay more tax, up to 90% for top earners
  • Shorter working week
  • Lower retirement age from 62 to 60
  • Pull out of international trade treaties and focus on French manufacturing

4) Francois Fillon (Conservative, Les Républicons) the staus quo candidate

  • Scrap 35hr working week
  • Extend retirement age from 62 to 65
  • Reduce corporate tax
  • Reduce public spending by EUR100b by cutting 500k public sector jobs

5) Benoît Hamon (Socialist) and one of the most established and largest parties

  • Universal and basic income of EUR600 minimum
  • Wants Europe to invest EUR1T into urban and green technology
  • Tax wealth generated by robots

Costs of the parties election pledges:

Fillon EUR 11.3B saved

Macron EUR 1.3 B saved

Hamon EUR 90.7b cost

Le Pen EUR 98.4b cost

Melenchon EUR 118.5b cost

Latest polls:

IFOP poll: Macron to beat Le Pen in the 2nd round - LiveSquawk

So here is why, in part, that the traditional parties such as the conservatives, Fillon and socialists, Hamon, are behind in the polls.

It is down to the people wanting a change from the status quo. For instance, small business is the engine of any economy and in France, there is more than 3 million business that falls into this category and is responsible for almost half of all employment n France. 

Entrapenures, who would usually vote conservative, Fillon, are fed up with the administration of EU law that brings a lot of red tape and charges when, say, employing new staff, expanding the business and developing products, services or even evolving into new related markets. People want a different type of politics in France and more and more are looking towards Le Pen's Front National party, just for the pleasure of seeing where it might take them, or simply two fingers up to the status quo. Indeed, an electoral shock could be a good thing to those suffering under EU law. The two main parties will get a slap in the face if they are not in the 2nd round! The feeling is, something has to change, and if that means testing someone that has not proved themselves politically, then so be it. 

What about the markets?

Markets are anxious. France is the second biggest economy in Europe. It was one of the founding members of the EU and EMU project.Markets are worried about the outcome of the elections given the unusually wide variety of economic policies, from pro market and EU to a fairly old style socialist version. 

However, more importantly, you have the potential fate of the EMU and EU as a whole. The props of the ECB will eventually fall off, and when that happens, France will need a deal with the Germans and the second wave of institutional progress on the eurozone. For this to happen, you need a pro-European president in power in Paris. Thus, it does not just matter to France who wins, for the future of Europe as a whole. 

It would be the first time that a major funding member of the EZ would be potentially deciding to leave. Although it is not clear how or by what means, but it is a possibility on the table that needs to be discussed. If France leaves, there is very little hope of the EU surviving as the union would be so wounded and incomplete - it would make no sense for it to continue without France. Moreover, the same forces would be at play in other member nations too should France leave. 

The idea that Le Pen or Melenchon could win has triggered an increase of risk premium on French assets as you can see in the difference between 10-y yields between France and Germany. This is generating concern, because if either of these wins the second round on May 7th, as Eurosceptics, the market reaction could be very dramatic. 

However, whoever wins on 7th May, they will still need to confirm the victory in the PARLIAMENTARY elections which are in June. Investors are increasingly knowledgeable about this so we could see a first-time knee jerk reaction just after the presidential election on the 7th May and then a wait and see period and consolidation phase until we see whether the president will get a real possibility to implement his or her policies after the June elections.

Video: How to trade France elections with Joseph Trevisani, Martin Armstrong, and Ashraf Laidi


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