France: Le Pen’s risk keeps markets alert to French election results

European investors shocked by the rise of the far right in France’s presidential election are awaiting the results of the first round, which is expected later on Sunday, according to Bloomberg.

The euro, French stocks and even Italian bonds are among the assets that have come under pressure as opinion polls have dramatically narrowed the gap between President Emanuel Macron and chief contender Marin Le Pen. The average of the Bloomberg polls from Friday showed that Macron is leading with only 3.5 percentage points in the first round.

Sunday’s election is expected to lead Macron and Le Pen to a run-off on April 24, with each seeking to form a broader coalition of voters in a one-on-one confrontation. If the preliminary results are expected around 8 p.m. in Paris suggest Le Pen is performing better than expected, the euro and futures futures in the region could face further sales during trading hours in the Asia-Pacific region.

“Should Macron outperform the polls, there is room for higher electoral risk premiums on French assets,” said Aila Mihr, senior analyst at Danske Bank A / S. “Watch out for voter turnout estimates published during the day. Lower turnout, as opinion polls suggest, could hit Macron.”

Turnout as of noon in Paris on Sunday was 25.5%, the interior ministry said, about three points lower than it was at the same time in the 2012 and 2017 presidential elections.

A delayed rise of Le Pen, the National Alarm candidate, has pushed French political risk onto market radar once again. Things seemed to be moving in Macron’s favor after Russia invaded Ukraine in late February, shifting the focus from domestic politics and allowing the incumbent minister to project himself as a safe pair of hands in troubled times. Macron, 44, started his election campaign in earnest just over a week ago.

But Lepen, whose city and village tours have focused on issues such as inflation, has made investors offset the chances of a reversal. The 53-year-old nationalist has projected herself as a defender of the “little ones” against Macron’s reputation as the “president of the rich”. He promised to reduce gasoline prices and tax the big energy companies.

French stocks, including lenders BNP Paribas SA and Societe Generale SA, were hit last week as opinion polls showed Macron’s lead declining. The shares have outperformed during his term. Although Sunday’s first round is almost certain not to be an absolute winner, it will shed light on how much risk investors are facing.

The resumption of the wealth tax on financial assets, along with the privatization of public service broadcasting, the nationalization of highways and the reduction of toll prices, is likely to affect the shares of financial corporations, the media and the media. , as well as companies with government shares, such as Electricite de France SA and Aeroports de Paris, were mentioned by the strategic analysts of Barclays Plc.

On the other hand, Le Pen plans in favor of purchasing power could boost domestic consumer games in the retail, food and leisure sectors, they said. The Carrefour SA grocery store, which is considered a potential acquisition target, could benefit.

The strategic analysts of Goldman Sachs Group Inc. They say the consequences of a Le Pen victory would be greater for Europe than for France alone, given that Macron has sought to promote European integration. It could increase the risk premium for the shares, in order to cause the prices of the Stoxx Europe 600 index to fall by 7%, wrote the strategic analysts headed by Peter Oppenheimer.

Lepen’s risk has already weighed on the euro, which slipped 1.5% last week against the dollar to its lowest level since the early stages of Russia’s invasion of Ukraine. The negative climate in the stock market is close to the levels observed before the 2017 French elections, although this also reflects the compensation for the war in Ukraine, inflation and monetary policy.

This also leads to risk measures in the bond market. The difference between the benchmark yields of France and Germany has risen to its highest level since March 2020. The equivalent of Italian and German debt, an indicator of the wider eurozone climate, has risen by almost 20 basis points this month to around 170 basis points and the Goldman Sachs team sees that it will shoot between 180 and 210 basis points if it wins.

However, most investors are not worried as much as in 2017. In its third attempt to take over France’s top spot, Le Pen tried to soften its views to expand its base. He has abandoned the idea of ​​Frexit, ie a French exit from the European Union, similar to that of the United Kingdom.

“None of the main candidates today want to leave the EU directly, and that was not the case five years ago,” said Gilles Guibout, head of European equities at Axa Investment Manager. “There will be adjustments, whoever wins, but not massive policy changes.”

For now, the only thing traders can do is wait and compensate. Even if Le Pen wins the presidency, the legislator’s vote in June will determine how many of her plans can pass. A strong showing in both cases could push the euro below the dollar for the first time in two decades, according to strategic analysts at Nomura Holdings Inc. although this remains an extreme scenario.

“There is still no ‘panic’ associated with the French elections, but we certainly see increased vigilance on the part of investors, who must now incorporate this electoral uncertainty into the geopolitical and monetary risks that already exist,” said Alexandre Baradez. Chief Market Analyst at IG France. “A victory for Le Pen would be a shock to the markets. It would be bad for business and it would damage France’s image with foreign investors.”