French elections – which markets to watch?

The outcome of the French election has now become more uncertain, and we look at key markets to watch.

Eiffel tower
Source: Bloomberg

It wasn’t supposed to be like this. The script for the French election previously ran as follows: Marine Le Pen has a strong showing in the first round, perhaps even coming first, while a centrist candidate, either Emmanuel Macron or Francois Fillon (probably the former), is the other candidate to go through to the second round, to be held on 7 May. Le Pen would then be defeated as French voters rallied around the centrist, preventing the Front National (FN) from ascending to the presidency.

Now, the polls are showing a strong performance by leftist candidate Jean-Luc Melenchon, with the margin of error suggesting that Fillon, Le Pen, Macron and Melenchon each have a shot at being one of the two to go through to the final contest. This is beginning to cause jitters in the market, as the spread between French and German 10-year bonds hits a seven-week high. What was supposed to be a predictable contest may now be blown open. Haven’t we been here before?

Both Le Pen and Melenchon want to put France’s euro membership to a popular vote, and both are opponents of the EU project, at least in its current form. A possible French exit from the single currency, and potentially even the EU, will likely destabilise markets, at least in the short term. The lesson of Brexit and of Trump is that we should not get too apocalyptic in our predictions. Even if one of these two ‘fringe’ candidates were to win, it would be difficult for them to put their manifestos into practice as complex constitutional changes cannot be enacted by presidential fiat. They require the approval of both chambers of the French parliament, in which neither the FN or Melenchon’s party La France Insoumise (FI) have majorities.

Still, the lesson of 2016 is that unlikely outcomes can never be discounted. A victory by either Melenchon or Le Pen would likely cause tremors across financial markets. The euro, for example, would likely face a downward move against the US dollar, as investors buy up the US currency, and Treasuries, as a safe haven move against volatility. Stock markets in the eurozone, which often receive a boost from a falling currency, may instead suffer again as money flows move to the UK or US.

Gold would be another one to watch here – the classic flight-to-safety trade would likely be reignited by a shock victory of Le Pen or Melenchon. Normally in a world of rising economic growth, gold would be out of favour but a win for an outsider could be just the thing to get gold moving sharply higher once more.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.