European markets will breath a collective sigh of relief on Monday as pro-EU centrist Emmanuel Macron looked set to win a second term as France’s president, beating rival far-right candidate Marine Le Pen.
First projections after Sunday’s run-off election showed Macron securing around 57-58% of the vote. Such estimates are normally accurate but may be fine-tuned as official results come in from around the country.
While a Macron win was the likeliest outcome, markets had fretted about his relatively small poll lead over Le Pen, who favours nationalising key industries, slashing taxes and cutting French contributions to the EU budget.
The euro should now get a boost when it starts trading in Asia in a few hours’ time, while French and European markets were expected to open higher, at least initially, on Monday.
“What we have learned form the last couple of years is that the polls are good but not completely reliable,” said Marchel Alexandrovich, European economist at Saltmarsh Economics in London. “So, we are likely to get a relief rally, there would have been such a big upset if Le Pen had won.”
The yield premium demanded by investors to hold French 10-year bonds versus European benchmark Germany — a key barometer of relative risks — fell to a three-week lows around 42 basis points on Friday as investors anticipated a Macron win.
French stocks closed almost 2% lower (.FCHI) and the Euro Stoxx 600 closed down 1.8% (.STOXX) as rate-hike jitters weighed on global stocks.
While Le Pen had toned down her anti-euro rhetoric, there was no shortage of initiatives that would have put Paris on a collision course with EU partners.
So relief at Sunday’s election result should be felt across the euro area too.
Kasper Hense, a senior portfolio manager at BlueBay Asset Management, said he expected the French/German yield gap to move 10 bps tighter, noting BlueBay had gone short Italian debt on a view that markets were “a bit complacent” ahead of the election.
“While over the medium term there will be some pressure on peripheral bonds, the immediate market reaction will be one of relief,” he said.
Macron will become the first French head of state in two decades to win a second term, promising continuity in the bloc’s second biggest economy at a time of heightened uncertainty unleashed by the war in Ukraine, surging inflation and the prospect of the rapid withdrawal of central bank stimulus.
Shares of French banks such as BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA) and Crédit Agricole (CAGR.PA), which rallied after Macron’s strong showing during Wednesday’s key TV election debate, could also see more gains on Monday.
Other analysts such as Seema Shah, chief strategist at Principle Global Investors, said that after the knee-jerk reaction attention was quickly likely to return to central banks’ response to soaring inflation.
European Central Bank officials are keen to end bond purchases at the earliest opportunity and raise interest rates as soon as July, sources familiar with ECB thinking told Reuters.
Focus will also shift to France’s June parliamentary elections. To implement reforms, the new president will need to secure a parliamentary majority.
That election will have a significant bearing on the future policy, so investors with specific French exposure may bide time before taking a view.
“Is the outcome of this election clear enough to anticipate that the June parliamentary elections will give the President a majority that will allow him to implement his pro-business and pro-European policies desired by the markets?” said Frederic Leroux, a member of Carmignac’s investment team.
“It seems dangerous at this stage to take it for granted.”
France Election I Emmanuel Macron addresses supporters after a victorious re-election as president