The outcome of the first round on 23rd April remains a close call and I am once again reminded of President de Gaulle who, in a nod to the French electorate’s heterogeneity, asked how it was possible to govern a country where 258 varieties of cheese exist.
This granular political landscape has come into focus in recent weeks. Polls show that in the first round National Front candidate Marine Le Pen and the centre-left independent Emmanuel Macron are still slightly ahead of far-left candidate Jean-Luc Mélenchon and Republican François Fillon but the margins are barely statistically insignificant.
Moreover, a large share of voters – up to 45% of the registered electorate – remain undecided on whether and how they will vote. These voters will likely swing the election.
Nevertheless, I am sticking to my core scenario that Macron will make it to the second round which he would win regardless of whom he faces given his strong cross-party political support and reasonably high popularity amongst voters.
While all the main candidate advocate some kind of reform of the EU and eurozone, Le Pen is campaigning on the premise that France needs to leave the eurozone and has promised to hold a referendum on France’s EU membership if elected.
Implied euro volatility has surged – a trend partly attributed to markets pricing in a higher probability of either Mélenchon or Le Pen being elected president. But actual euro volatility remains subdued and the fall in the euro and 2 and 5-year French government bond prices in recent weeks has been modest.
The consensus forecast, which I share, is that the Euro and French government bonds will rally if Macron or Fillon is elected president while the Euro would weaken sharply and French yields rise significantly should Le Pen or Mélenchon become president.
However, with an almost infinite number of scenarios to consider, any forecast of where European financial markets may end up and how they get there remains tentative at best.
There has been little focus on the elections for the French National Assembly, to be held over two rounds on 11th and 18thJune and yet they will decide the composition of one of France’s law-making institutions and dictate from which party hails the Prime Minister.
Unless Fillon becomes President, it is likely that for the next five years the President and Prime Minister will not come from the same party or share the same political agenda – a period of “Cohabitation” which would clip the authority of Le Pen, Mélenchon and to a lesser extent Macron, and is usually associated with political instability.
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