French election round 1: Outcome to add positive risk tone for the week ahead - Westpac

As noted by Tim Riddell, Research Analyst at Westpac, and Sean Callow, Senior Currency Strategist also at Westpac, the most likely and relatively market-friendly French presidential outcome of Macron facing Le Pen has occurred. The Analysts add that the fact that Macron appears to have received the most votes should add to the more positive risk tone for the week ahead, though multi-week, the Assembly elections in June should temper the current optimism.

Key Quotes

With 85% of the vote counted, centrist Emmanuel Macron had won 23.6% of the votes in the first round of the presidential election, ahead of the National Front's Marine Le Pen on 22.2%. Macron and Le Pen now head into the 2nd ballot run-off on 7 May. Although the final results will not be officially released until 5pm on 26th April, there is no remaining doubt over who will face off in two weeks' time.

The rise of EUR and risk appetite rebounding in early trading hours is understandable and this should also see yields in Europe fall, spreads to Bunds tighten and stocks rally. EUR/USD closed Friday at 1.0728 and bounced as high as 1.0940 in response to the election results, steadying just under 1.09. Risk barometer AUD/JPY is up about 1.6%, at 83.60, around 3 week highs. However, such gains are likely to be contained when markets reflect upon the marked shift away from the "establishment" and just how effective the new president may be.

In the interim, a swathe of both Socialist (Hamon was first off the blocks) and Republican officials (including Juppe and Fillon) have voiced their support for Macron in a cross-party bid to defeat Le Pen. This should underscore the likelihood of a sweeping victory in the second round for Macron. Polls had suggested that Macron would beat Le Pen and this had been rising into the actual election on Sunday towards 65% to 35% respective polling.

What is critical for the effectiveness of the likely Macron presidency is how supportive the Assembly will be and importantly how that Assembly will look after their own two rounds of ballots, which take place on 11th and 18th June. The fall of the established two-party system (Socialists and Republicans) in the presidential election (this is the first time that there has been no representation from at least one mainstream party) may have well ramifications for the Assembly voting. A fragmentation of the two-party system could well result in a weakened legislature which grapples with the task of building a coalition, rather than the previous indications that the Republicans would sweep away the current and unpopular Socialist government. How Macron would sit above such an Assembly is not clear - it may well mean a period of uncertainty and then ineffectiveness.

This move away from the post-WWII norm under the 5th Republic in France is also a disconcerting sign of the recent moves away from the "establishment", whether it be referred to populism or not. Political uncertainty in EU may continue to unsettle markets into the German elections in September and there is still a relatively large possibility of Italian elections being called later this year (Italian elections have to take place in spring of 2018 if not before).