Stock and Bond Market Analysis

2022-04-09

  • The French presidential election begins this weekend.
  • Investors are anxious about the impact that a shock Marine Le Pen victory could have on European markets, with polls narrowing.
  • Eight experts shared their market outlook ahead of Sunday’s first-round vote.

The first round of the French presidential election begins this weekend, with voters determining which two candidates will appear in the April 24 run-off.

The major story in recent days has been Emmanuel Macron’s narrowing lead over Marine Le Pen. Le Pen, who leads the far-right National Rally party, has closed the gap on President Macron to as little as three percentage points, according to a survey by Harris Interactive.

European investors will be closely following the contest. Insider gathered the thoughts of eight market analysts from Wall Street firms like Bank of America, Goldman Sachs, and UBS.

Macron and Le Pen

The two candidates that receive the most votes on Sunday advance to a run-off election on April 24.

There’s a firm consensus on Wall Street that Macron and Le Pen will reach the second round – a repeat of the 2017 presidential election, which Macron won by a landslide with 66% of the vote. All of the firms surveyed said that Macron remained the favorite, despite his narrowing poll lead.

“In ‘horse race’ terms, this re-run is producing a touch more suspense, with financial markets beginning to react to the narrowing of Macron’s second-round opinion poll lead,” Christopher Granville, who is the managing director of EMEA and global political research for the macroeconomic forecasting consultancy TS Lombard, said in a research note.

“However, a Le Pen victory remains firmly in the tail risk category,” he added. “Le Pen cannot realistically overhaul Macron’s lead – barring, between now and 24 April, some game-changing shock or scandal.”

Macron looks to have a healthier lead in most second-round voting scenarios. Le Pen trails by six points on average in polls of second-round voting intentions, according to Politico.

“If opinion polls are a guide, Emmanuel Macron is on course to secure a second term in office,” UBS economist Dean Turner said. “Investors have been looking through this election, given the high likelihood that Macron still is in office. Some estimates are as high as a 95% chance of Macron winning the final round.”

Scenario 1: a Macron victory

Macron’s re-election would be unlikely to have a significant impact on stocks and bonds, as it would mark a continuation of the pro-market status quo.

“The election is likely to become an increasingly important topic for markets in the coming days,” Peter Schaffrik, a global macro strategist at RBC Capital Markets, said in a recent research note. “A second Macron term would likely be viewed as representing stability and continuity, and taken as the most benign outcome.”

Bank of America economists Evelyn Hermann and Ruben Segura-Cayuela predicted that a Macron victory would benefit large-cap European stocks, such as those listed on the Stoxx Europe 600, because of the President’s pro-EU economic stance.

“Macron’s re-election seems the most likely outcome,” they said. “From an economics and markets perspective, [he may] be the most EU-asset friendly [candidate].”

Goldman Sachs Paris’ chief economist Alain Durré forecast that Macron will spend $30 billion on “strategic sectors” and raise the French army budget to $50 billion. This could potentially benefit French-listed digitalization, semiconductor, and defense stocks.

Scenario 2: a Le Pen surprise

A Le Pen victory on 24 April would likely lead to significant turbulence for European markets.

Her surge in the polls over the past week has already rocked French stocks and bonds. IG Group’s chief market analyst for France pointed out that the Paris stock exchange’s leading index, the CAC 40, is down relative to its European competitors.

“The underperformance of the CAC40 over the last 48 hours against most European stock market indices points to growing tension in the markets,” Alexandre Barradez said. “All the major European indices fell on Tuesday and Wednesday but the CAC40 posted a more marked decline.”

The spread between German, Italian, and French bonds is also up over the past week, indicating investor nervousness.

A Le Pen upset would likely make European markets more volatile because it would create significant political instability. Le Pen is unlikely to win an outright majority in the parliamentary elections next June, so she would have to form a coalition – potentially with Reconquête, the far-right political party led by her rival Éric Zemmour.

“A victory for Le Pen on 24 April would shake up the French political landscape and would have important consequences for both diplomacy and Europe,” Barclays economist Phillipe Gudin wrote in a research note. He warned that a Le Pen presidency could lead to a “political crisis” that “would translate into heightened uncertainty and possibly negative implications for economic activity”.

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