22 April 2022
The French elections heat up: Here’s what you need to know
The future of political democracy in Europe is unfolding in France with the presidential election well underway. In the last round of voting, Emmanuel Macron the current President took first place (27.8% of votes), beating the far-right leader Marine Le Pen (23.2% of votes). While polls do suggest he should remain as president come Sunday 24 April, the results from the first round show that his win is far from secure. In fact, the polls show the results are likely to come out much closer than the last election 5 years ago. This will be far from a clear cut victory.
Nevertheless, Macron is in the lead, albeit slightly, and Wall Street seems to prefer him as president. Not only is he perceived as more friendly to businesses, but he also has a background in banking, while Le Pen could cause more friction to the markets, with her rather more dramatic views and agenda.
Macron’s agenda coming into this election lies in building up the labor market, cutting corporate taxes and working on further integration with Europe.
A continuation of Macron as President for a second term could mean a limited impact on the financial markets as they would retain a sense of stabilization, however in the longer term, his premiership could encourage growth. On the other hand, if Le Pen were to win, this could spook the markets.
Here are the assets to watch as we head into the second round of voting:
The French markets performed better under the premiership of Macron in contrast to the rest of Europe. If he rewins the election, market participants are hoping to see more of the same.
As France is the second-largest economy in the European Union, the possibility of an upset in the realm of politics could have an effect on the Euro. One simply has to look at the options market to understand the risks involved in owning the Euro at the moment. Hedging costs to protect from a drop in the currency over the last week have risen to the highest cost since mid-March. A recent survey of institutional investors and hedge funds has seen added exposure to shorting the Euro. Further adding downward pressure is the Federal Reserve and its tightening policy.
The trend in the Euro has been lower for quite some time, and any uncertainty in the world of politics will do no favors for the common currency. The Euro will more likely than not continue to suffer at the hands of a trapped central bank, but uncertainty in its second-largest economy could add further pressure to the downside.
The Euro has been drifting lower against the British pound for quite some time and has shown no real proclivity to let up. If there is some type of shock in the election, the initial “knee-jerk reaction” will almost certainly be a strengthening of the Sterling against the Euro, which could send the currency below the 0.82 level, an area that has been steadfast support for the Euro since mid-2016. Further exacerbating this potential move is that the British pound has been much more stable than the Euro as of late.
Keep in mind that the Bank of England continues to suggest that they will be fighting inflation, while the European Union has a much more difficult situation on the horizon. A lack of energy certainly will be a major concern as the import of natural gas from Russia has shrunk considerably and has even stopped at one point.
The starkest of reactions could be in the energy sector, as Europe has been struggling to supply natural gas recently. The ongoing conflict in Ukraine has Europe weaning itself from Russian gas, and even Germany suggests that coal may be back on the table. Marine Le Pen has suggested previously that banning wind power would be one of the moves that she would make. She would go further by banning all subsidies for green energy.
More likely than not, Marine Le Pen will be seen as much more “friendly” toward traditional hydrocarbons than Emmanuel Macron has been. This could be another boost for energy going forward.
Meanwhile, a Macron win could see a boost to Energies, as he is in favor of building up to 14 more nuclear reactors to gain more independence in this sector. That being said, energy markets have been racing higher long before the race tightened, but this could throw gasoline on the fire.
This election, on the face of it, might look much like the Macron-Le Pen face off in 2017, but underneath the hood, it is very different. The fact that Le Pen has managed to draw so close in the votes speaks of the opinions of the French people. So what will the outcome mean for the markets? Well, if Macron wins, this means stability and a continuation of today’s status quo and therefore we can expect a limited impact on the markets. If, on the other hand, Le Pen becomes president, we would expect to see major volatility in the above-mentioned sectors and indeed in French stocks and indices.