Stock and bond market analysis

  • The French presidential election begins this weekend.
  • Investors are worried about the impact that a shock victory for Marine Le Pen could have on European markets, with the polls tightening.
  • Eight experts shared their market outlook ahead of Sunday’s first-round vote.

The first round of France’s presidential election begins this weekend, with voters determining which two candidates will stand in the second round on April 24.

The major event of recent days has been the tightening of Emmanuel Macron’s lead over Marine Le Pen. Le Pen, who leads the far-right National Rally party, narrowed the gap with President Macron to just three percentage points, according to a Harris Interactive survey.

European investors will follow the competition closely. Insider collected the thoughts of eight market analysts from Wall Street firms such as Bank of America, Goldman Sachs and UBS.

Macron and Le Pen

The two candidates who receive the most votes on Sunday qualify for a second round on April 24.

There is a firm consensus on Wall Street that Macron and Le Pen will reach the second round – a repeat of the 2017 presidential election, which Macron won with a landslide of 66%. All of the companies surveyed said Macron remained the frontrunner, despite his lead in the polls.

“In terms of ‘horse racing’, this rally produces a little more suspense, as financial markets begin to react to Macron’s narrowing lead in the second round of opinion polls,” said Christopher Granville, who is the managing director of EMEA and the world. policy research for macroeconomic forecasting consultancy TS Lombard, said in a research note.

“However, a Le Pen victory remains firmly in the extreme risk category,” he added. “Le Pen cannot realistically reverse Macron’s lead – barring, by April 24, a game-changing shock or scandal.”

Macron appears to have a healthier lead in most runoff voting scenarios. Le Pen trails by an average of six points in runoff voting intention polls, according to Politico.

“If opinion polls are any guide, Emmanuel Macron is on course for a second term,” said UBS economist Dean Turner. “Investors have looked at this election, given the high probability that Macron will still be in power. Some estimates go as high as a 95% chance that Macron will win the final round.”

Scenario 1: a victory for Macron

Macron’s re-election is unlikely to have a significant impact on stocks and bonds, as it would mark a continuation of the pro-market status quo.

“The election is likely to become an increasingly important topic for markets in the coming days,” said Peter Schaffrik, global macro strategist at RBC Capital Markets, in a recent research note. “A second term for Macron would likely be seen as representing stability and continuity, and seen as the most benign outcome.”

Bank of America economists Evelyn Hermann and Ruben Segura-Cayuela predicted that a Macron victory would benefit large-cap European stocks, such as those listed on the Stoxx Europe 600, because of the president’s pro-EU economic stance.

“Macron’s re-election seems the most likely outcome,” they said. “From an economic and market perspective, [he may] be the most respectful of EU assets [candidate].”

Goldman Sachs Paris chief economist Alain Durré predicts that Macron will spend $30 billion on “strategic sectors” and raise the French military’s budget to $50 billion. This could potentially benefit French digitization, semiconductor and defense stocks.

Scenario 2: a Le Pen surprise

A victory for Le Pen on April 24 would likely cause major turbulence for European markets.

Its surge in the polls over the past week has already rattled French stocks and bonds. The IG group’s chief market analyst for France pointed out that the Paris Stock Exchange’s flagship index, the CAC 40, is down compared to its European competitors.

“The underperformance of the CAC40 over the past 48 hours against most European stock indices indicates growing tension in the markets,” said Alexandre Barradez. “All the major European indices fell on Tuesday and Wednesday, but the CAC40 posted a more marked drop.”

The spread between German, Italian and French bonds also widened over the past week, indicating nervousness among investors.

A reversal of Le Pen would likely make European markets more volatile as it would create significant political instability. Le Pen is unlikely to win an outright majority in June’s legislative elections, so she would have to form a coalition – potentially with Reconquête, the far-right political party led by her rival Éric Zemmour.

“A victory for Le Pen on April 24 would shake up the French political landscape and have important consequences both for diplomacy and for Europe,” writes Barclays economist Phillipe Gudin in a research note. He warned that a Le Pen presidency could lead to a “political crisis” which would “translate into heightened uncertainty and possibly negative implications for economic activity”.

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