Bookmakers and public opinion polls suggest a comfortable win for Emmanuel Macron in this Sunday’s second round of the French presidential election, notes VP Bank (Singapore), the Asia Pacific operation of the Liechtenstein-based private bank.
However, “the Damocles sword hovers nonetheless – this in the form of a surprise victory by the European Union (EU)/euro-opposed Marine Le Pen and her Front National, an event that could herald-in the breakup of the European sisterhood of states,” write the bank’s chief economist Thomas Gitzel and Rolf Kuster, senior investment strategist, in a report issued following the first round on April 23.
“Opinion pollsters see Macron clearly in the lead, as he most likely can count on left-leaning and conservative voters switching to his camp in the grand finale… But even though the research institutes are largely of the same mind, there is no absolute guarantee that he will come away the winner,” they add.
The report notes that the election takes place against a background of steady growth in France’s gross domestic product (GDP) since early 2013, with the economy expanding at an annual rate of 1.2% in 2016. With the gradual takeover of domestic demand as the primary driver of growth of the country, the economy is boosted by both the weaker euro and an increase of credit demand spurred by low interest rates.
Gitzel and Kuster comment that there will be contrasting ramifications in the financial markets, depending on which candidate wins the second round on May 7, with each representing contrasting views and proposed changes to the country:
“The political chasm between the two French presidential candidates could hardly be wider: Emmanuel Macron stands for pro-EU, laissez-faire policies; Marine Le Pen for almost the exact opposite,”
“A victory by the Front National would undoubtedly trigger a bad case of nerves in the financial markets. On the other hand, if the favoured Emmanuel Macron comes away the winner, no major price/yield upheavals are likely to result.” Gitzel and Kuster assess the two contenders as follows:
Marine Le Pen:
A French conservative with nationalistic ideas, Le Pen intends to reclaim France’s “four sovereign rights”: monetary policy, law-making, budgetary/economic policy and territorial determinations, which presents the possibility of the country’s withdrawal from the EU and ultimately relinquishing the euro (EUR) in favour of the franc. Within a global outlook, this would mean the devaluation of the US dollar (USD) against the euro. Furthermore, a ‘Frexit’ signals a severe endangerment to the EUR and devastation in the equity markets.
A fan of unionism, Macron has stated his intent to join Germany in its efforts of a fully-united Europe. Key items on his agenda includes renegotiated wages at company-specific level, enhanced educational and personal development programmes and cuts of corporate taxes from 33.3 to 25%. These reform changes are seen to be welcomed by the strike-predisposed French. Although a Macron victory would mean a slight but brief response to the euro, the French equity markets remains modest with a lagging growth rate of 7% in projected earnings compared to its peers in the EU.
The implications of either election outcome for markets, suggests the report, are as follows:
The euro should respond positively to a Macron election win such that the EUR/USD is bumped to the vicinity of 1.10, although it is likely that EUR has already discounted a Macron victory to “the greatest extent”. The Swiss National Bank (SNB) would also scale down its interventions in response, causing the flight of capital into the franc to wane. As such, the EUR/Swiss franc (CHF) is likely to continue within the trading range between 1.06 and 1.08.
Conversely, Le Pen as president would cause a “worldwide wave of uncertainty”, which would drive flight into the USD space such that the greenback could rapidly relocate to the neighbourhood of 0.9 versus the euro. Switzerland can also be expected to remain in demand as a safe haven but despite the SNB’s increased intervention volumes, would remain unable to keep the EUR/CHF above the level of 1.06.
Macron’s win could spur the European Central Bank (ECB) to start tapering its monthly bond purchases, such that the yield on 10-year German government bonds (bunds) can be expected to rise by 0.5%, while that on 10-year Swiss government bonds (confs) remains essential unchanged, estimates VP Bank.
However, with the eurozone’s survival in question in a Le Pen scenario combined with the strong demand for safety, yields on 10-year bunds could potentially be pressured back down to “practically zero”, while 10-year confs could be priced with a negative yield of around -0.4%.
Chances for the French equity market remain modest even with a Macron win, as VP Bank regards the CAC 40 as relatively expensive already. In addition, its projected earnings growth rate of 7% also lags that of neighbouring eurozone economies. Nonetheless, Europe generally still offers upside potential as international investors avoid crisis-plagued regions, which could in turn draw capital back to European exchanges. Continental banks, as well as Italian stocks are likely to benefit from such a shift, the report suggests.
An unexpected Le Pen win would hit financial markets hard in contrast, leading to a weaker euro that would brighten the outlook for export-oriented companies. Heavy selling pressure is almost inevitable, as international investors are likely to “sit on their hands and avoid the entire eurozone until the dust settles” in this case.
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