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Taking stock of the situation and decrypting current issues

2017-03- Logo french election
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The essential

 

 

This note is the first in a series that will accompany you until the results of the presidential and legislative elections (and probably a little further). Here we set the scene before proposing specific thematic topics. Our next editions prepared by our economists and strategists will focus on:

 

Voting polls: where do we stand?

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French elections are a major concern for the financial markets because they are emblematic of current trends: the rise of far-right (or respectively extreme left) parties in the EMU core countries (respectively peripheral countries), the growing rejection of the establishment, protectionist temptations, hostility towards Europe and / or towards the European institutions, the fight against inequalities, the debate on the sharing of added value (employees vs. shareholders)... The election of an anti-European candidate or the election of a candidate who wants to reform Europe or leave the EU in the event of failure to reform it (as advocated for example by Marine le Pen or Jean-Luc Mélenchon) is currently perceived as a vote in the continuity of the Brexit and the election of D. Trump in the United States.

This is not at all our central scenario, but it seems legitimate that risk premiums (spreads against Germany, volatility, CDS ...) remain at high level until we see more clearly the outcome. Let us also recall, and it is very important, that Brexit votes and American elections took place on a single round: the one who is won the first round had been elected. This is not at all the case of the French elections, where the second round is likely to drastically rebuff the cards. The winner of the first round has no assurance of being the winner in the second round: the game of alliances and voice transfers always makes the difference. One of the objectives of this note is to explain all of this in detail, and to present the scenarios involved.Let us recall that four electoral deadlines are emerging:

  • The presidential elections (on Sunday 23 April and Sunday 7 May 2017)
  • The general elections (Sunday June 11th and Sunday June 18th), to replace 577 members of Parliament.
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2017-03- Candidat-2

In total, only 5 candidates are likely to win over 10% of votes in the first round of presidential elections: Marine Le Pen and François Fillon for the right, Benoît Hamon, Emmanuel Macron and Jean-Luc Mélenchon for the left.

For the right-wing parties, François Fillon and Marine Le Pen are irreconcilable on many subjects, not least of which Europe, protectionism, immigration policy, and any alliance for a second round of elections is impossible.

The case of the left is more complex: with three candidates to date plus two other candidates of the ultraleft, it is the most fragmented part of the political landscape.There will, however, be three major candidates, representing three relatively traditional routes:

  • Supporters of the "big bang", represented by the extreme left and advocating radical changes. This big bang is represented by Jean-Luc Mélenchon, but also by other candidates like Philippe Poutou or Nathalie Arthaud;
  •  Proponents of the welfare state, whose measures quickly end up burdening the major financial and budgetary equilibriums. It was clearly the political cornerstone of François Mitterrand and François Hollande, and it is the way also of Benoît Hamon for the 2017 presidential election;
  • Supporters of competitiveness, both of companies and governments. This trend has always existed and it has always been a minority for decades. It is embodied today by Emmanuel Macron, who reminds us of the intellectual turn of the German SPD party in 1959 which considered that "the market as much as possible, and the state as much as necessary" had to be the proper target. Many left-wing voters who, on the contrary, want a more marked left-turn on the part of the Socialist Party, do not recognize themselves in this political programme, which they consider to be in some respects close to the programme of the François Fillon conservative right. Macron also reminds of Tony Blair (former British Labor Prime Minister) who tended to consider that "the economy is neither right nor left ... there is just what works and what does not”.

Beyond these divisions, we must be clear: the challenge of all the national elections to come (in the Netherlands, in Italy, in France and in Germany) lies in the sustainability of European integration. Among all the candidates of the French presidential election, only Marine Le Pen (Front National, at the far right of the national chessboard, and Jean-Luc Mélenchon ("France Insoumise", close to the extreme left of the national chessboard) are openly hostile to Europe or, more exactly, to the European institutions as they are currently  organized. Both candidates consider they have to leave Europe if it is not possible to change it. As for the other candidates, either they come from openly pro-European parties like François Fillon (Party of Republicans (conservative right) and Benoît Hamon (Socialist Party, "classical" left), or their movement is based on the will to participate in the European Union (Emmanuel Macron, “En Marche!”, a center-left and center-right movement since its association with François Bayrou (MODEM)). It is true that the two Euro-skeptical / anti-European parties currently collect 40% of the voting intentions (slightly less than 30% for Marine Le Pen, just over 10% for Jean-Luc Mélenchon), but their association is totally impossible.

As regard the current polls, the risk Mélenchon represent to Europe is currently much lower than the risk Le Pen, but we do not bet at all on these risk scenarios. However, it is certain that the seizure of power of the Front National party (Marine Le Pen) would make the case Frexit possible (exit of France from the European Union). Mrs Le Pen is indeed considering reforming the EU or leaving the EU one of her main battles: she has clearly announced that if France is not able to change, over a period of 6 months, the economic policy, the immigration policy ... then she would proceed, as promised, to a referendum on the exit of the EU. Here comes a key question: are the French people ready to send their country on the way out of the EU? Not sure, in fact, but there is no doubt that this risk (the "Frexit") will continue to have an impact on the EU and more specifically on EMU: the fragility of the euro, the rise in spreads in peripheral countries (including France) against Germany would be the main consequences... We do not believe in such a scenario, with France exiting EU and EMU and with Mrs Le Pen being elected. In Germany, both Angela Merkel and Martin Schulz (former President of the European Parliament) are supporters of Europe, as are also Emmanuel Macron and François Fillon in France, two candidates who, to date, have the greatest chance of gaining the elections. But before this happens, the financial markets will have to face three critical situations:

  • First, they will have to live with the prospect of seeing the extreme right party emerge at the top of the first round of presidential elections. According to the surveys, Marine Le Pen, at the time of writing, would lead Emmanuel Macron (Movement "En Marche!", moderate left), François Fillon (conservative right) and Benoît Hamon (Socialist party), and Jean-Luc Mélenchon (Left) with respective scores of 26%, 23.5%, 20.5%, 13% and 11% respectively (Ifop, February 24, 2017). According to this poll, the voting intentions for the former Minister of Economy (E. Macron) are the most "fragile": nearly one out of every two voters who said they want to vote for him were still ready to change its mind, a percentage well beyond all other candidates. This ratio is the same, globally, which of course adds another zone of uncertainty. Have in mind that all polls do not conclude in the same way: For example, on the same date, the KANTAR SOFRES onepoint survey indicated (see page 2) that the security of the choice of vote in the first round was similar for E. Macron and F. Fillon (only Mrs Le Pen got a much higher percentage). This is not to say that the polls should be rejected; rather, we must keep a critical eye and know the limits (see box below).
2017-03- What to think about polls
  • Then, through the play of transfers of votes at the second round of the presidential elections, and according to the current polls, they should live the elimination of Marine Le Pen in the second round of the presidential elections .... It should be noted that, due to the transfers of votes and the ability of the right-wing parties to withdraw for the left-wing parties, and vice-versa, French voters have so far eliminated the extreme right of most elections, national, regional, municipal elections also ... It is said that in elections the French chose with their hearts in the first round and with their minds in the second.Marie Le Pen is expected to be defeated by both E. Macron and F. Fillon, and the difference is statistically significant.
  • Finally, it will be necessary that the newly elected president (presumably E. Macron (leading polls) or F. Fillon) attracts the voters to obtain a presidential majority in the legislative elections, the only way to have a stable government. The two candidates are clearly  pro-European and their election would mean the emergence of a strong Franco-German axis and governments capable of carrying out reforms.The right-wing candidate will benefit from the support of all his camp (the right wing), which is not really the case with E. Macron, judged by many socialist voters as a sort of "dissident." He is now perceived as a centrist, witnessed by his recent alliance with MODEM François Bayrou, centrist candidate of the last three presidential elections (2002, 2007 (when he finished 3rd in the first round with almost 19% of the votes) and 2012). In the event of Macron's victory, the perceived risk would be to find himself with a president without support of a homogeneous party, which would be complicated. Such a situation would be highly probable with Marine Le Pen and Emmanuel Macron (except for the massive and unconditional rallying of the Socialist deputies), quite high with Benoît Hamon, and not negligible with Francois Fillon. The risk, ultimately, would be to have a country politically at a standstill.

Conclusion

The French elections revive fears about the euro zone, but these fears seem largely exaggerated. Bet on an improvement in spreads against bund (and in particular the spread OAT-Bund) and sovereign CDS after the elections. In the meantime, adopting a wait-and-see attitude (with a negative bias to France and other peripheral countries) still seems to be the best strategy.

2017-03-France financial market

 

 

read more

  • An overview of the French economy (forthcoming);
  • Rigidities of the French economy and potential reforms: the opinons of international organisations and of the candidates for the presidential election (forthcoming);
  • Europe: what do the candidates for the presidential election think about it precisely? (forthcoming);
  • French debt: state of play and points of attention (forthcoming);
  • Margin rates of French companies: where do we stand now? (forthcoming);
  • The positions of the candidates for the presidential election on fiscal and tax policy (forthcoming);
  • French bond yields and OAT / Bund spread: ECB's role and perspectives (forthcoming);
Philippe ITHURBIDE, Global Head of Research, Strategy and Analysis at Amundi
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Taking stock of the situation and decrypting current issues
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