Election: Expect Positive Market Reaction
France chooses the centrist path forward. With Emmanuel Macron, the French have elected an outspoken defender of European integration. The result is positive for both Europe and markets.
French voters have elected Emmanuel Macron as their next president. With more than 65 percent of the vote, Mr. Macron has been given a solid mandate to govern once he moves into the Elysée. Despite considerable momentum of candidates at the far end of the political spectrum, first and foremost the National Front's Marine Le Pen, France has ultimately chosen a centrist candidate to lead it forward.
Yet, the considerable number of votes for Marine Le Pen (slightly less than 35 percent) is a sign that a large number of French voters want a very different approach to politics, and this may well hang over the new President. Voter turnout was lower than for the first round of elections and was also lower than in previous elections. It is noteworthy that there was a significant amount of empty ballots as well.
Strengthening the Key Franco-German Alliance
Emmanuel Macron is an outspoken defender of the European project, a believer in France's place in the European Union and Eurozone. We consider him to be a constructive partner for Germany as efforts get underway to strengthen the crucial Franco-German alliance in the face of Brexit and other challenges. To what extent Macron will be able to implement domestic reforms is somewhat less clear, as his En Marche! party is unlikely to reach anywhere near a majority in the parliamentary elections on the 11th and 18th of June 2017. Since the party was only created a year ago, it is currently not yet represented in Parliament.
The next issue of interest will be the shape and form of the government to serve Emmanuel Macron. While he has engaged in talks with members of Les Republicans, it is more likely that his government will come from the ranks of center and left of center parties. Ideally, Les Republicans would help to pass reforms in the areas of labor markets, wealth tax and pensions. The new president will also be tested on other areas, such as security, during his tenure.
Expect Positive Market Reaction
Despite the uncertainty related to government formation and a potential implementation of reforms, the election result is a positive for Europe and markets from our point of view. In the short term, we expect the EUR to bounce only marginally against the USD and the CHF, since we already saw a strong repricing after the first-round results as a Macron win was beginning to be anticipated. We eventually expect the EUR to return closer to pre-election levels against the USD due to the still divergent monetary policies in the Eurozone and the USA. Equity markets, too, are very likely to continue to attract investors, with financials expected to do particularly well.
Our current positive view of Eurozone equities leaves us well positioned to benefit from such an upswing. Keep in mind, however, that, as for the common currency, equity markets started to price the positive election outcome in the wake of the first round. In fixed income, we expect French and European bond spreads to compress further.