PIG TODAY-4 things investors need to know about France’s presidential runoff

The counting continues, but it looks clear that centrist Emmanuel Macron will face off against far-right National Front leader Marine Le Pen in a May 7 French presidential election runoff that could decide the fate of the European Union.

Indeed, French voters face a stark choice. Le Pen has called for scrapping the euro and exiting the European Union — moves that would almost certainly be fatal to both the shared currency and the trading bloc. Macron is firmly committed to the European Union, where he says he wants to usher in a new era of cooperation with Germany, and is also the mirror image of Le Pen on other hot-button issues, including immigration.

Here’s what investors need to know as they await the second round.

Relief rally

The euro  jumped in Asian trade following the initial results, trading near $1.09 and a five-month high on widespread expectations Macron will prevail in the final round.

The move could also contribute to gains for French government bonds, allowing the closely watched yield premium that investors demand to hold 10-year French bonds, or OATs,+10.03% over benchmark German government bonds +4.34% or bunds, to narrow after widening to around 75 basis points, or 0.75 percentage point, ahead of the first round.

Expectations for a Macron victory could also add to outperformance by European equities SXXP, +0.02% which have already been the subject of growing bullish interest among foreign investors worried about stretched U.S. stock-market valuations.

Why are bulls confident in a Macron victory?

Polls show Macron defeating Le Pen in the second round — and not by a small margin. A survey released by Ipsos/Sopra Steria late Sunday showed Macron likely to prevail 62% to 38% in a head-to-head matchup.

French Election: Macron and Le Pen Through to Final Round

Centrist Emmanuel Macron and far-right candidate Marine le Pen will face off in the May 7 runoff that decides who becomes the next president of France.

To some extent, that’s because Macron is expected to gain from a “anyone but Le Pen” sentiment among supporters of the first round’s major also-rans. Conservative candidate François Fillon and Socialist candidate Benoît Hamon wasted no time endorsing Macron on Sunday night, though far-left candidate Jean-Luc Melenchon had yet to throw in the towel. Simply put, the National Front remains highly controversial and Le Pen’s candidacy is likely to mobilize many voters to turn out in the final round to support her opponent.

To be seen with a more viable chance, Le Pen would have needed to see either low first round turnout or score at least 28% or more of the vote, Eurasia Group said, in a Sunday note. Neither of those conditions were met, with just shy of 70% of voters turning out for the first round, according to French interior ministry figures.

Is a Macron victory assured?

Last year’s surprise vote by the United Kingdom to leave the European Union and Donald Trump’s victory in the U.S. presidential election in November should remain fresh in mind. In other words, there’s no sure thing.

A terrorist attack late last week may have given Le Pen a boost heading into the first round, pundits said. The potential for events and campaign-trail gaffes to alter the outlook should be kept in mind.

Polls “have consistently shown that Mr. Macron will easily beat Mrs. Le Pen, but that is a dangerous assumption,and a lot can happen in two weeks of campaigning, said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

A defeat for the status quo?

While investors cheering a Macron victory are breathing a sigh of relief over what looks like to be a win for the economic status quo in the face of a global wave of populism, it’s worth noting that Macron is far from a traditional candidate.

Opinion: The next president of France will be a demagogue

Indeed, France’s two traditional center-right (Fillon’s Republicans) and center-left (Hamon’s Socialists) parties both went down to defeat. Macron, a 39-year-old former investment banker and civil servant who has never held elected office, mounted an outsider bid of his own. After leaving the Socialist party, he built his own party, known as “En Marche.”

Legislative elections will follow in June. But with neither the National Front nor En Marche enjoying a strong, nationwide presence, the next president will have to work with the major parties to enact legislation — a scenario that could easily lead to gridlock.

Source: marketwatch.com