Markets neutral after Macron win, focus shifts to ECB outlook

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The result of the French presidential election was as expected by the polls: Emmanuel Macron won the run-off against Marine Le Pen by a decisive margin: 66.1% to 33.9%. This headline number should be put into perspective. Le Pen, of the far-right Front National party, won record support in the second round, although less than predicted by the polls. Around a quarter of the electorate abstained and another tenth cast blank or invalid ballots, indicating that neither candidate appealed to them.

While Macron had been seen as the most market-friendly candidate, the actual reaction by financial markets was muted. Eurozone and French equities opened slightly higher after Sunday’s vote, but quickly sank into negative territory. While the losses are small so far, French equities are underperforming the main eurozone index. German Bund yields are down marginally with risk spreads of French government bonds over Bunds essentially unchanged and risk spreads on ‘peripheral’ eurozone bonds over Bunds widening somewhat. This may look disappointing, but the limited sell-off in equities comes after strong gains since the start of the year – particularly since mid-April – and with French equities having outperformed marginally so far. So it clearly looks like equity markets had discounted a Macron victory based on his consistent showing in the polls ahead of the vote: French bond yields and risk spreads had declined in recent weeks. In our view, this is a classic example of ‘buy the rumour, sell the fact’.

The market focus will likely now shift to the elections for the currently socialist-dominated, 577-seat National Assembly in mid-June, where Macron – a newcomer to elected office – faces another challenge now that the French electorate has become more fragmented. Markets will closely follow the polls to see whether Macron’s centrist En Marche movement, started only last spring, can actually get close to a majority. Polls conducted after the first round showed that En Marche ! could end up becoming the largest part in the assembly. Alternatively, Macron will have to work with other, more established parties to implement his domestic reform programme centred on more efficient government, reduced government spending, lower taxes and labour market reform.

But the outcome of the French presidential election also has broader implications. With this political risk now largely behind investors, the eurozone on a decent and stable growth path with steadily falling unemployment, financial markets will look to the ECB for clues as to its policy in this constellation. We expect the eurozone central bank to drop existing forward guidance about a possible need for lower interest rates. This should be followed in September by announcements on the tapering of the ECB’s pro-growth and pro-inflation asset purchase programme.

We believe the result of the French election has made it more likely that the ECB will follow this path. In our view this partly explains the market’s reactions, especially in bond markets. ECB tapering would mean less buying support and may lead to higher risk spreads on ‘peripheral’ bonds. Of course, the developments in bond markets will also be impacted by Italian politics, which will be another factor for investors to watch for besides the German elections this autumn.

Written on 8 May 2017

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