The French Elections Removed One Uncertainty



The French election had more drama leading up to a victory by Emanuel Macron, then the outcome. The victory saw the middle of the road candidate easily defeat the right-wing candidate Le Pen, by nearly a 22% margin, as he won 66.1% of the popular vote to 33.9% to Le Pen.  Victories by U.S. President Donald Trump and an UK victory for Teressa May, provided the backdrop for tension leading up to the vote.  The fact that Trump and May’s victories were not captured by the polls, made investors uneasy adding to the volatility seen in gold trading.

Macrons Victory

The markets already started to celebrate a Macron victory in the week leading up to the final Presidential election runoff on May 7.  Markets had expected Macron to win and barring a Le Pen miracle,the rally in European stocks and boost for Eurozone peripheral bond would continue. Following the victory the CAC hit fresh highs, and less than 2-weeks later, the DAX and the FTSE soared to fresh all-time highs.

The unfolding of the French elections saw Le Pen, a populist candidate, surge in popularity in the wake of the surprising elections in the U.S. and U.K.  Unfortunately for the right, France is a socialist nation, and right wing ideas, are unlikely to float.  The populist concepts, which include a reduction in healthcare benefits in the U.S., at the expense of the poor, and going it alone in Europe without a blanket trading policy, are unpopular. The U.K. is now heading toward snap elections in early June, as May appears to want to solidify her popularity. While it is unlikely that this strategy will backfire, she is giving the opposition a chance to win back the losses they experience during the recent referendum to Brexit. In the United States, the management style of Donald Trump is wearing thin and the markets are starting to wonder whether the new President can move forward with his agenda, while he is mired in scandal and poor communication.

The ECB is Poised to End QE

Less uncertainty on the political front, however, also means Draghi is heading for a change in the forward guidance in the European Central Bank’s June meeting. For now, this won’t amount to much more than dropping the implicit easing bias, which is still in place, but clearly, investor is already looking ahead to next year when quantitative easing tapering occurs. What the ECB will likely say is that at year end, they will re-evaluate the market environment and if it continues on this current path, they will begin to reduce quantitative easing.

Rate hike expectations are also being brought forward after Praet suggested that the guidance that rates won’t rise until well past the end of asset purchases will be data dependent. Draghi will have the chance to signal any post-election shift when he speaks in front of the Dutch Parliament on Tuesday, while the economic bulletin, which is out on Thursday is likely to stick to Draghi’s dovish message from the last policy meeting.