Broker Check

Markets Respond Positively to First Round of French Presidential Election

| April 26, 2017

The first round of the French Presidential election took place on Sunday, narrowing the field to two contenders who will compete in a runoff election. The global financial markets responded positively to the results, which will pit Marine Le Pen, who is considered a far-right candidate, against Emmanuel Macron, who is considered a more centrist candidate. In reality, the runoff election may be a referendum on the future of France. Will the nationalist/isolationist views that won the Brexit vote and the US presidential elections carry the day or will a more centrist, pro-globalization view win in France?  

The global financial markets clearly view the first round results as a positive for the global economy. Many feared the worst case scenario in which Le Pen, the far-right candidate, and Jean-Luc Melenchon, the far-left candidate, ended up in the runoff. In this case, both candidates would have been against France remaining in the European Union, creating a Brexit type scenario regardless of the winner. However, with Melenchon finishing fourth in the first round of the election, giving way to a showdown between Le Pen and Macron, the result is less clear.

Yet investors clearly believe that Macron is the favorite to carry the finally round of the election scheduled for May 7th. Macron received the largest percentage of votes during the first round of the presidential election and is expected to appeal more to both centrist and left-leaning voters than Le Pen. This has resulted in a global market rally as investors price in the expected results.

The next question is, after the initial reaction to the election results, how will the financial markets respond longer-term? This is important because the French election results may mark a turning point in a long-term  market trend.  Over the past several  years,   the US stock market has strongly outperformed foreign stocks. This may be partly due to stronger economic results in the US and partly due to a perception of increased risks abroad due to the potential break-up of the European Union. In addition, the US dollar has been strong compared to the Euro, reflecting investment dollars flowing from Europe to the US. However, European economic data has improved recently, making European stocks appear more attractive. In addition, the French election results may signal that the risk of the European Union dissolving may be declining. This could lead to foreign stocks outperforming US stocks and the Euro strengthening against the US dollar. Both of these changes occurred following the French election results. The question is: Will they continue?

Finally, investors must now ask if the market is too optimistic about Macron’s chances to win the French presidency. True, at this point he looks like the odds on favorite given the results of the first round of voting, but as we have seen in both the Brexit vote and the US presidential election, elections have become harder and harder to call in recent years.

Should the anti-Euro sentiment prove enough to cause voters to back Le Pen despite differences in political views, or if another terrorist incident occurs, she could still carry the day.  In that case, the global financial markets may reverse course quickly. Fortunately, we only have to wait two weeks for the results.