French election could be a bigger shock to markets than Brexit or Trump

French voters are expected to hand Emmanuel Macron another five years as president of France on Sunday, favoring the current chief executive over far-right candidate Marine Le Pen, after a heated election campaign. Investors, however, are preparing for another scenario.

With polls indicating the presidential election will be tighter than when the two candidates faced off in 2017, traders are bracing for a surprise victory for Le Pen, which would shake Europe’s second-biggest economy as fears grow. a recession in the region.

“It could be bigger than Brexit. can be greater than [a derrota do ex-presidente dos Estados Unidos Donald] Trump, if Le Pen prevails,” said Michael Hewson, chief market analyst at CMC Markets.

In research published on Tuesday (19), Citi strategists estimate Le Pen’s probability of winning at 35%. Still, they encouraged clients to hedge their bets on French government bonds and warned that a Le Pen victory would hurt the shares.

“Uncertainty stems from the risk of low voter turnout, as left-wing voters refuse to cast their vote for Macron, even at the risk of handing over to Le Pen,” they wrote. “Electoral turnout is a factor that researchers find particularly difficult to predict accurately.”

Le Pen’s victory would immediately raise questions about France’s political and economic ties to the European Union (EU), although she has backed out of her pledge to pull the country out of the bloc. Its political goals — such as preventing foreign workers from going to France, which would erode freedom of movement in Europe — could still create serious conflicts.

“Most of Le Pen’s policies would not be possible within the EU,” said Grégory Claeys, a senior fellow at Bruegel, a think tank in Brussels.

This could trigger a “Frexit”, or French exit from the European Union “by accident”, he continued. If France under Le Pen pushes ahead with policies that violate EU law, he predicts there would be an exodus of capital as investors withdrew money from the country, like when the UK voted for Brexit in 2016.

Savings front and center

Le Pen won support during the first round of voting earlier this month, focusing on rising cost of living while reducing his rhetoric against immigrants and Islam.

“My absolute priority for the next five years is to give the money back to the French people,” she said in the televised debate with Macron on Wednesday.

French inflation hit 4.5% in March, pushing consumer confidence to its lowest level in more than a year. Energy prices, which have jumped since Russia’s invasion of Ukraine, are up 29% from 2021, while food prices are nearly 3% higher.

As inflation erodes spending, economists have warned France’s economy could shrink later this year.

“Wages, especially low ones, are not rising at the same rate as prices are rising,” said Boris Plazzi, a board member at the Confédération Générale du Travail, a 700,000-member workers’ union. “So there’s a real concern on the part of workers.”

Le Pen has promised to restore between 150 euros ($163) and 200 euros ($217) a month in household purchasing power by cutting fuel taxes, reducing road tolls and cutting social benefits like subsidized housing for foreigners.

“Food and fuel prices really dominated the day-to-day campaign,” said Mujtaba Rahman, managing director for Europe at consultancy Eurasia Group. “That’s one of the reasons she’s been so successful.”

But Macron criticized his plans in Wednesday’s debate, noting that it makes more sense to continue government policies that help the poorest, rather than taking less targeted measures such as cutting fuel taxes.

He also highlighted the 1.2 million jobs created during his presidency and said the government will keep a temporary ceiling on electricity and gas prices, which has helped keep inflation lower than elsewhere in Europe.

Still, rising prices are a risk for Macron as he tries to woo millions of voters who remain undecided. About 40% of France’s population lives on less than 1,600 euros ($1,736) a month, and many of them abstained or voted for left-wing candidate Jean-Luc Mélenchon in the first round of the election, according to Le Monde. .

If Le Pen wins

Le Pen’s scrutiny has increased since the first round, particularly for his previous support for Russian President Vladimir Putin, and Macron remains the favorite. Eurasia Group believes he has an 80% chance of re-election.

If Le Pen wins, however, it would rattle financial markets, which are already jittery due to the war in Ukraine and waning expectations of economic growth.

When Donald Trump was elected President of the United States in 2016, markets initially panicked. But the fears were short-lived as investors decided that cooler heads would prevail and Trump would be barred from following his most extreme policies.

The effects of the UK vote to leave the European Union lasted longer. The British pound has fallen and has not yet recovered its level in June 2016.

Amundi, the French asset manager, told clients last week that she does not recommend buying European stocks now because of the war and economic uncertainty. The French election, she said, is another reason to stay away.

“Markets seem complacent about a Macron victory, even if the likelihood of an unfriendly victory for Le Pen is not negligible,” Vincent Mortier, chief investment officer, said in a note.

While Le Pen has reversed her earlier proposal for France to leave the European Union, she is still committed to reducing ties between France and the bloc by launching a series of referendums.

If she tries to stop workers from other parts of the EU going to France or takes steps to stop the free movement of goods, it will also raise worrying questions about the future of the country – and the bloc itself.

“Even if leaving the EU is not officially on the agenda, given the policies it wants to put in place, it would lead to a confrontation with European partners,” said Bruegel’s Claeys.

Much would depend on the June legislative elections, which would determine the strength of any Le Pen term.

“A victory for Marine Le Pen would need to be followed by a strong showing by her party in the June legislative elections if she is to implement the bulk of her program,” said Jessica Hinds, Europe economist at Capital Economics.

If she needs to seek out a broader coalition of support, that would “cut her wings, at least in domestic politics,” Hinds continued. “So a Le Pen presidency may be less radical than many investors fear.”