Macron’s lead is a relief for investors, but markets are on edge

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Emmanuel Macron’s better-than-expected lead in the first round of the French presidential election brought immediate relief to markets worried about a victory for his nationalist rival Marine Le Pen.

The euro rose during early trading in Sydney as currency markets opened this week after early estimates showed Macron had a voting share of nearly 29%. That was good news for investors, who had feared a closer competition and a wave of support for its rival. European stock futures, French equities and even Italian bonds could follow suit from the results when those markets open Monday.

Macron faces Le Pen in Runoff for French presidency

Despite the euro’s rebound, markets could remain cautious for another two weeks as Macron and Le Pen try to build a broader coalition of voters in a one-on-one deadlock. The incumbent’s win is not yet certain, especially as some traders fear that votes from lagging candidates like Jean-Luc Melenchon and Eric Zemmour could go to Le Pen. All that Sunday’s results did is reduce the prospect of panic selling.

“The numbers are quite encouraging,” Andrea Cicione, head of research at TS Lombard, said by phone after the poll estimates. “There is a significant gap between Macron and Le Pen. So if that carries over to the second round, that seems like a good development for the markets, especially for the bond markets.”

The euro rose 0.5% to $1.0936 after falling to a one-month low on Friday. To preserve gains, investors will be watching for signs the 44-year-old president can consolidate his advantage and avert the threat of a Le Pen victory. Yields on French 10-year bonds soared last week to a seven-year high amid concerns that Le Pen, with long-standing sympathy for Russia, could take power amid the war in Ukraine.

“Macron has a comfortable lead and that’s reassuring,” said Alexandre Baradez, chief market analyst at IG France. “He hasn’t won yet and the campaign will be tough in the next two weeks. But I expect this result, if confirmed, to be slightly positive for the CAC 40 Index.”

Risk remains

Investors and strategists remained divided on what Sunday’s results really meant. While some took comfort in Macron’s leadership, others pointed to the still-living possibility that Le Pen could consolidate anti-Macron votes ahead of the April 24 final round. The first poll after the results gave him just a narrow 51%-49% margin over Le Pen in the second round.

Macron leads Le Pen 51%-49% in poll ahead of French runoff

The combined voting stock of Melenchon, Zemmour and Le Pen showed this was a “vote of anger” against the current government, said John Plassard, director at Mirabaud & Cie.

“Left and right are gone,” he said by phone. “Now it’s a choice between continuity, with Macron, and the extremes. It is a shock to French politics. The CAC Index will not collapse tomorrow, but I expect some pressure on equities and also on bonds as a result.”

Melenchon himself advised his supporters not to vote for Le Pen, while Zemmour told his to support her.

French stocks, including lenders BNP Paribas SA and Societe Generale SA, were hurt last week as polls showed Macron’s lead was narrowing. Stock traders will watch to see how they receive Sunday’s results, with Macron getting 28.1%-28.6% of the vote, versus Le Pen’s 23.6%-24.1%. The margin was wider than what the polls had predicted leading up to the vote. Stocks outperformed over the course of his tenure.

A stock traders’ guide to French elections: winners and losers

Against the dollar, the euro fell 1.5% last week to its lowest point since the early stages of Russia’s invasion of Ukraine. Negative sentiment in the options market was close to pre-French elections in 2017, but that also reflects the hedging of the war in Ukraine, inflation and monetary policy.

The fierce battle has also led to risk measures in the bond market. The difference between the French and German benchmark rates has risen the most since March 2020. The equivalent between Italian and German debt, a gauge of sentiment across the eurozone, is up nearly 20 basis points this month to around 170 basis points, and the Goldman Sachs team sees it rise to between 180 and 210 basis points if they wins.

Even if Le Pen wins the presidency, the legislature will determine in June how much of her agenda she can get through. With a strong performance in both, the euro could fall below par against the dollar for the first time in two decades, according to strategists at Nomura Holdings Inc., although that remains an extreme scenario.

“Macron must now pay attention and his camp must remain mobilized,” said IG’s Baradez. “Some voters might think it’s a foregone conclusion and the risk is abstention. He has to pay attention: he hasn’t won yet.”

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