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French election: ‘Frexit’ risk reduced as Macron wins first round

French election: ‘Frexit’ risk reduced as Macron wins first round

A sense of relief has engulfed investors watching the results of the French presidential election’s first round of voting as centrist candidate Emmanuel Macron edged out far-right candidate Marine Le Pen to top spot.

The results will be vindication for polling groups in France after their UK and American counterparts came under fire after the shock results of the Brexit referendum and US election results.

The second round will take place on May 7, pitting new rising star Macron against Le Pen with many commentators expecting a Macron victory. At 39, this would make the centrist candidate the youngest ever president in France’s history and his business-friendly and pro-European policies are expected to boost the country’s stock market.

Fund managers and French asset managers have welcomed Macron’s first round victory but aren’t cracking open the champagne just yet as the second round is still to come.

‘Most observers would expect a solid victory for the more establishment Emmanuel Macron over the far-right Marine Le Pen,’ said David Zahn, head of European fixed income at Franklin Templeton. ‘But if we’ve learned anything from recent political events, it’s to expect the unexpected.

‘The main stakes for the President-elect will be to win a strong majority in French parliamentary elections in June 2017. Until then, there may be continuing fluctuations in financial markets to which we will continue to be attentive.’

For many Macron is likely to struggle to win a majority as he remains a divisive figure in French politics, having never served an elected office in his short political career.

For Amundi’s Philippe Ithurbide, global head of research, there is one main lesson to be taken from the first round result.

‘The major lesson from the presidential election is the elimination of the Frexit [French exit from the European Union] scenario, which is a very important step,’ he said.

‘This positive news should materialize into a positive mood on financial markets. The elimination of extreme scenarios will favor an appreciation of the euro, a decline in OAT [French government bonds]/Bund Spread and an increase in French bonds and equities.'

Market impact

According to Carmignac’s Didier Saint Georges, a member of the group’s investment committee, the result will led to a short market boost.

‘Many international investors had managed the risk of "extreme outcomes" through optional tools. The unwinding by market makers of these positions will contribute to a short term relief rally,’ said Saint-Georges.

‘Beyond this short term effect, the geographic rotation of equity allocations that was underway from the US to Europe and Emerging markets will be allowed to resume, based on different stages of economic cycle.’

Franklin Templeton’s Zahn goes further saying that a Macron victory on May 7 would likely produce a rally in French government bonds in the short term.

‘However, in the longer term, we think his policies would not be as positive, so therefore that could be negative for French government bonds over time,’ he added.

‘Macron’s pro-EU tendencies would likely be positive for the euro and that also means peripheral government bonds would probably do well should he win. On the other hand, I don’t think German government bonds would probably do as well.’

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