“The first round of the French presidential election went as markets and polls anticipated. Although the center-left candidate, Emmanuel Macron, will probably win the final round in a couple of weeks, the risk of a Marine Le Pen presidency should not be ignored.”
“The Guardian reports that this region has traditionally been a left-wing (or liberal) bastion, but now the right-wing nationalist, Marine Le Pen, is pinning her hopes of the French presidency on the smattering of small towns in this province and elsewhere throughout France. She is picking up on the same anger and disillusionment that Donald Trump did in the United States just months ago. And a Le Pen victory, while unlikely, would be toxic for the European Monetary Union.”
Tail risk
‘’With this first round tallied, a Le Pen presidency is much less likely than prior to the vote, but still poses a significant tail risk to financial assets. Marine Le Pen wants to leave the euro, but victory alone would not necessarily imply ‘Frexit’: a French exit from the euro or broader European Union. She’d need some sort of parliamentary or court approval to hold a Brexit-like constitutional referendum. And right now, Le Pen’s National Front party has only two seats in Parliament. Parliamentary elections in June could change that, but the likelihood of gaining a majority is extremely slim. In fact, Parliament would likely be hostile to a President Le Pen, leading to plenty of gridlock and not much else. Le Pen’s opposition to the euro would likely significantly strain relations between France and Germany and other euro members.”
“The true problem with a Le Pen presidency would likely be the financial stress that follows. Even a small probability of a French exit from the euro would put significant downward pressure on the currency and upward pressure on French interest rates. Contagion effects could spread to borrowing costs for Italy, Greece, and even Spain. As investors would then sell euro-denominated assets, the U.S. dollar would likely surge. The U.S. 10 year could breach its post-Brexit low of 1.36% (remember, price is inversely related to yield). A very strong dollar could significantly drag down U.S. company profits and exports. In turn, the Federal Reserve (Fed) would pause, if not reverse, its path to higher interest rates. The European Central Bank (ECB) would likely try to pop up the financial system and conduct even more asset purchases.”
“Investors are relieved that the center-left candidate Emmanuel Macron sailed into the second round. Risk assets have rallied hard in response. But Le Pen is still in the race, and the chance of her presidency, while small, looms until the final round of votes are tallied.”
By Robin Anderson, Principal Global Investors’ Senior Economist
