Macron Faces Le Pen in May | ECB & Fed vigilant of French Election Outcome

Posted by Naeem Aslam | 24/04/2017 08:53

*Le Pen and Macron facing each other in round two on the 7th of May.
*CAC and Euro pop while Bond yields drop but not for long.
*ECB Needs to play it’s A-game.  
*Fed would pay close attention to elections in France.

We have the most eminent outcome of the French election, Macron and Le Pen going head-to-head in round two. The French election has given us the strongest signal yet how the voter upheaval that prompted the UK’s Brexit vote and Trump’s elevation to the White House echoes through Europe’s core.
Macron is certainly the favourite among Eurozone leaders, but it is important to emphasise that his party is a new party which lacks experience, so there are a lot of risks here. However, Fillon, who has been dropped by voters, has asked his supporters to back Macron and this could provide a final push to get Macron over the line, something the markets would like.  
The outcome of today’s election has put another successful stamp on polling data and investors are going to pay a lot of attentions to this. So, going forward, a lot of movement in French debt and the euro is going to be dependent on the polling numbers.
Globalisation has been under major threat since Brexit and we think this is going to remain the major focus for the second round of elections. Macron will have to work twice as hard to get himself across the line and this is by no mean an easy task, especially in light of the recent terrorist attacks in France.
There was a lot of noise suggesting that Le Pen was ahead with her strong support, but that was due to rural polling which closed before the bigger cities had their say.
Signals for the Market
The euro-dollar pair has gapped much higher because we have not seen the worst case scenario for the market. We are edging on the level of 1.10 or possibly 1.11, but this trade may fade as Le Pen is still in the French presidential race. This is going to keep traders on the sidelines throughout the day.
Liquidity in the market is more than the usual and this is mainly due to the significance of the election.
Again remember that the bounce that we are seeing in the euro-dollar pair is highly likely to be temporary and traders are going to start taking the profit off the table sooner than expected.
As for French debt, we expect them to recover as well and the spread between the French and German 10 year may also narrow but not for long. Le Pen is the threat and it will not subside until she is knocked out. Then we can return to the basics of monetary policy divergence and debt issues.

ECB Needs to Play a Game.
All eyes are going to be on the ECB and traders would like to see what plans the bank has to ward off any uncertainty coming from the French election. The bank needs to make sure that they assure the market that this tail risk can be contained and will not explode out of control. Simply put, the ECB not only has to pretend but actually has to bring their ‘A-game’ now.
Fed Going to Wake Up to European Political Risk
We currently have a flight to safety scenario and the dollar is strengthening as a result of this against the euro. The Fed has not paid much attention to the European political situation yet, but with Le Pen’s victory, we think they would strongly look at factoring in this risk. This is because today’s result shows us that Le Pen could win the election on the 7th of May and this would change the playground over in Europe.  

Read Also: