Financial market research and analysis

How does the French election work?

Voters pick the French head of state every five years and (like Britain’s EU referendum) it’s a ‘popular’ vote - so every vote counts.

There are 11 candidates this time, which doesn’t include President Francois Hollande who is the first sitting president not to seek a 2^nd term for the first time in modern French history.

There are two rounds to the French presidential election. This is similar to the US presidential election which has primaries and then one national run-off between the remaining candidates.

1^st round – April 23^rd

2^nd round – May 7th

One candidate could win more than 50% of the vote in the first round and win the election. The typically large number of candidates makes this unlikely and it always goes to the second round.

The two candidates who receive the most votes in the first round progress to the second round. The candidate who wins the second round will become President.

Polling stations close between 7pm and 8pm in France (CET) and the result usually becomes clear before midnight. Between 9pm CET (when markets open) and 12pm (when the result should be clear) on Sunday is when forex markets, particularly EUR pairs, are likely to be most active.

The inauguration typically takes place about 10 days after the election result and the president will take office before the parliament is elected.

Why is the French presidency important?

Brexit, the election of Donald Trump and the rise of nationalist candidates like Geert Wilders in the Netherlands and Marine Le Pen in France are part of a populist wave moving through the Western world. Populism is a reaction against globalisation and an uneven distribution of income - and a threat to the current world order.

The success or failure of populist candidates in Europe could play a significant role in the direction of global stock, bond and currency markets this year and beyond.

Nationalist candidate Marine Le Pen has promised to hold a referendum to take France out of the Eurozone and return to the French franc. France is one of the founding members of the euro, as well the second largest Eurozone economy after Germany. A French exit would almost definitely spell the end of the euro as we know it.

If Marine Le Pen were elected, her power to dictate a euro referendum will depend on the result of parliamentary elections two months later. There are two rounds of elections to select the National Assembly (the lower chamber of France’s parliament) on June 11 and June 18.

In a scenario in which Marine Le Pen wins the Presidency and then her party The National Front wins a majority in the parliamentary elections, a euro referendum is very likely. It would be plausible to see EUR/USD drop to parity. If the opposition gets a majority it would create a so-called cohabitation and make a referendum less likely.

How could markets be impacted by the first round?

LCG markets to watch:

EUR/USD

EURGBP

EUR/JPY

France 40

French shares

Bund

Gold

Aggregated polls published by Bloomberg show the top four candidates neck and neck. Emmanuel Macron is a narrow favourite with Marine Le Pen closely behind.

Francois Fillon sits in third place, having recovered slightly following the scandal that he paid his wife a parliamentary salary when reportedly she did little-to-no work. The surprise rise of the far-left candidate, Jean-Luc Mélenchon, places him in the fourth position.

Broadly speaking, a Le Pen presidency is expected to be bearish for the euro as well as French stocks (including the France 40 index), likely meaning a higher yield on French government debt. As a former investment banker and economy minister, Macron is the market favourite and would likely see the opposite reaction in markets to a Le Pen win.

Polling in recent elections has been notoriously unreliable so the game is on for the four main candidates.

There is scope for upset in the first round, but Marine Le Pen seems likely to ride the wave of populism into the second round. Big banks even held strategy meetings with the anti-European candidate to prepare themselves for possible Le Pen rule.

The general consensus is that the candidate who would play against Marine Le Pen has circa 60% chances of paving his way to the Elysée Palace.

It is widely expected for Le Pen to win through to the second round so if she does, the market reaction will probably be muted. The bigger opportunity could be if Le Pen unexpectedly falls out of the race early, causing a spike in the euro. In case of Le Pen-Fillon or Le Pen-Macron outcome, there is scope for a relief rally in the euro and the European shares on Monday.

Fillon’s return to form and Mélenchon’s surprise late rise has weighed on Emmanuel Macron’s chances of reaching the second round. Still, given that Macron is polling the best, it seems likely to be a Le Pen-Macron run-off.

The most bearish scenario for the markets would be a Le Pen – Mélenchon finale. This latter option is given low probability, yet if realised, would likely place EUR currency pairs under fundamental selling pressure.

A big surprise would be a duel between Francois Fillon and Emmanuel Macron. The latter is the most uncertain outcome for the second round so could cause an increase in euro, bond and stock market volatility.

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.