Macron’s Lead Is a Relief for Investors, But Markets Are on Edge

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Emmanuel Macron’s better-than-expected lead in the first round of French presidential elections brought immediate relief to markets worried over a victory for his nationalist rival Marine Le Pen.

The euro rose in early Sydney trading as foreign-exchange markets opened for the week, after early estimates showed Macron had a vote share of almost 29%. That was good news for investors, which had feared a closer contest and a support surge for his rival. European stock futures, French equities and even Italian bonds may take their cue from the results when those markets open Monday.

Macron Set to Face Le Pen in Runoff for French Presidency

Despite the euro’s buoyancy, markets may continue to be cautious for another two weeks as Macron and Le Pen seek to build a broader coalition of voters in a one-on-one standoff. The incumbent’s victory isn’t certain yet, especially as some traders worry votes from trailing candidates such as Jean-Luc Melenchon and Eric Zemmour may go to Le Pen. All that Sunday’s results have done is to reduce the prospect of panic selling.

“The numbers are quite encouraging,” Andrea Cicione, head of research at TS Lombard, said over the phone after the poll estimates. “There’s a significant gap between Macron and Le Pen. So if that gets carried over to the second round, that looks like quite a good development for markets, especially bond markets.”

The euro rose 0.5% to $1.0936 after sliding to a one-month low on Friday. For the gains to sustain, investors will be watching for signs the 44-year-old president can consolidate his advantage and ward off the threat of a Le Pen victory. The yield on France’s 10-year bonds rose to a seven-year high last week on concerns Le Pen, with longstanding sympathies for Russia, may take power in the middle of the Ukraine war.

“Macron has a comfortable lead and this is reassuring,” said Alexandre Baradez, chief market analyst at IG France. “He hasn’t won yet and the campaign will be tough in the coming two weeks. But I expect this result, if confirmed, to be slightly positive for the CAC 40 Index.”

Risk Remains

Investors and strategists remained split over what Sunday’s results really meant. While some took comfort from Macron’s lead, others pointed out to the still-alive possibility that Le Pen may consolidate anti-Macron votes before the April 24 final round. The first post-results poll gave him only a narrow 51%-49% margin over Le Pen in the second round.

Macron Leads Le Pen 51%-49% in Poll Ahead of French Runoff

The combined vote shares of Melenchon, Zemmour and Le Pen showed this was a “a vote of anger”’ targeting the current government, said John Plassard, a director at Mirabaud & Cie.

“The left and the right are gone,” he said by phone. “Now it’s a choice between continuity, with Macron, and the extremes. It’s a shock for French politics. The CAC Index won’t collapse tomorrow but I do expect a bit of pressure on equities and on bonds too because of this.”

Melenchon himself advised his supporters to not vote for Le Pen, while Zemmour told his to back her.

French equities, including lenders BNP Paribas SA and Societe Generale SA, were hurt last week as polls showed Macron’s lead narrowing. Equity traders will be watching to see how they receive Sunday’s results, with Macron getting 28.1%-28.6% of the vote, as against Le Pen’s 23.6%-24.1%. The margin was wider than what the polls in the run-up to the ballot had predicted. Stocks have outperformed over the course of his tenure.

A Stock Trader’s Guide to French Elections: Winners and Losers

The euro slid 1.5% last week against the dollar to its lowest since the early stages of Russia’s invasion of Ukraine. Negative sentiment in the options market was close to levels seen before the 2017 French election, though that also reflects hedging over the war in Ukraine, inflation and monetary policy.

The close contest has also been driving measures of risk in the bond market. The difference in benchmark French and German yields has risen to the most since March 2020. The equivalent between Italian and German debt, a gauge of euro-area wide sentiment, is up almost 20 basis points this month to around 170 basis points, and the Goldman Sachs team sees it surging to between 180 and 210 basis points if she wins.

Even if Le Pen were to win the presidency, legislature votes in June will determine how much of her agenda she can get through. A strong showing in both of these could see the euro slide below parity against the dollar for the first time in two decades, according to Nomura Holdings Inc. strategists, though that remains an extreme scenario.

“Macron must now pay attention and his camp must remain mobilized,” said IG’s Baradez. “Some voters could think it’s a done deal and the risk is abstention. He needs to pay attention: he hasn’t won yet.”

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