French Election Moves Fear Level from Orange to Yellow
Apr 24, 2017
The French Election Results – Polls Proven Correct and Point to Pro-EU Victory in Final Round: The French election results have assuage some markets fears on two fronts. First, there will be a pro-EU candidate in the final round of voting (Macron). The biggest fear coming into round one was the Le Pen and Melenchon would advance to the final round leaving no pro-EU candidates. France and Germany are obviously linchpins of the EU experiment and any move by the French to back away from the EU would have been disastrous. Second, the polling data proved accurate. This is important because the second round polling data shows Macron winning handily in the May 7 vote. This would remove one of the biggest global uncertainties we have identified for 2017. However ,it is worth noting that 17.9 million French voted for pro-EU candidates while 14.7 million voted for anti-EU candidates. There were an additional 3 million votes cast for candidates with no shot at advancing. All told, there were 19.4 million votes for candidates other than Macron and Le Pen. We will be watching the polling data over the coming weeks to see where these 19 million votes begin moving. If the election is turned into a referendum on EU membership, which Macron is likely to attempt, it appears he would have a solid victory.
Overnight Activity – European Equities Lead Global Rally as French Election Goes the Way of the EU: European assets are leading a sharp global relief rally after Sunday’s French election went as pollsters had projected. The EU-friendly centrist Macron and far-right Le Pen advanced to the second-round runoff on May 7 to see who will be moving in to the Élysée Palace. Current polls hand Macron an easy victory (20 to 30 point advantage) in the runoff over Le Pen whose candidacy has been seen as a threat to the EU, however, the next few weeks will bring more clarity to the polls. The Euro is 1.2% stronger against the Dollar after an initial 1.9% surge sent the common currency to its best level since November 10. The Dollar fell against a basket of currencies to its weakest level since November 11 but has been buoyed by a sharply deflated Yen. France’s CAC equity index is up an impressive 4.5% to its highest level since January 2008 and is leading strong gains in Europe. The Stoxx Europe 600 is 2.0% higher and U.S. equity futures have been boosted by roughly 1.0%. With the existential threat to the EU from a possible Frexit drastically reduced, European sovereign debt adjusted. Yields on French sovereign debt dropped by 7 bps to 12 bps across the curve while German yields rose between 9 and 11 bps. Treasury yields are higher in response, up 6.1 bps to 1.24% on the 2-year note, 5.5 bps to 1.83% on the 5-year note, and 4.3 bps to 2.29% on the 10-year note.