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It could be said that 2016 provided us with a blueprint – not just for politics being the biggest driver of multi-asset class volatility, but for unpredictable outcomes. Donald Trump's victory also taught us that even if you back the right horse, you can't predict the market reaction. No one had expected such a sharp sell-off in the US bond market and the subsequent rally in the USD on the same day he won the presidency. On the contrary; the world was expected to collapse.
So for investors and traders, calling the outcome of the French election – and indeed the market reaction to it – and is something for only the bravest of souls. The real issue here is that a victory for the extreme-right candidate Marine Le Pen would cause a massive wave of anxiety around the world’s capital markets, with Le Pen promising to take France out of the euro.
Of course, there is a complicated legal framework involved with pulling a sovereign out of an organisation that was never set-up to fail, but it would have to start with a referendum and a vote by the French public.
A French vote for Le Pen would be an implicit rejection of the euro, and while the EU may survive the UK's withdrawal, it might be tough to envisage a situation whereby the euro, and indeed the EU itself, can carry on without its second-largest economy and founding member.
Still, given current trends in French polling, a Le Pen victory in the second and decisive round still seems unlikely. As we get into the pointy end of proceedings, we have seen the Socialist Party nominate Benoît Hamon as its presidential candidate, but the damage inflicted on the Socialist Party from Mr Hollande’s terrible tenure as President may lead the voting public towards the centre – or even the centre-right.
Republican Presidential nominee François Fillon was the favourite for the election but the investigations into his potential misuse of public funds and salaries paid to his wife and children have seen him drop back significantly in the polling. A deep mistrust has hindered his chances here, in a comparable way to the investigations into Hilary Clinton just prior to the US election.
New polling (1 February) by Elabe portrayed the first round of voting on 23 April going to Marine Le Pen, with the new Presidential favourite, independent candidate Emmanuel Macron (centrist), coming second. Most importantly, this same polling suggests we could see the second round run-off election on 7 May being easily won by Macron, with polling suggesting a split of 65% to 35%.
This potential financial effects of this political event should start to come more onto traders' radars in the next few weeks, as the view is that if Le Pen gets even a sniff of victory it will send risk assets sharply lower. We are already seeing signs of concern with the CAC index and bond market underperforming that of its German counterparts. But there is clearly no concern being expressed in the wider region of the EU.
While the bookies are now saying that a Macron win is more likely, how do you even think about pricing in risk if France holds a referendum on the future inclusion in the euro? The answer to that is very difficult. Though that outcome seems unlikely, a win from the anti-euro Le Pen could make this election a huge event for global markets, sending send a massive deflationary shock throughout the world. One to think about.