- Market-friendly French election outcome depends on Macron getting past this Sunday’s first round
- UK snap election announcement sparks sharp sterling rally
- Beige Book will be watched for any explanation of weak consumer spending
- Weekly EIA report
Market-friendly French election outcome depends on Macron getting past this Sunday’s first round — This Sunday’s first-round vote for the next French president has the potential to cause big global stock market sell-offs next week if independent centrist Emmanuel Macron gets knocked out in the first round. At present, the polls suggest that Mr. Macron and National Front leader Marine Le Pen will take the top two spots in Sunday’s first round and then face each other in the second round on May 8. FT poll tracking currently shows support at 24% for Macron, 23% for Le Pen, 19% for both Communist-backed Melenchon and Republican Fillon, and 8% for Socialist Hamon.
If Macron wins one of the top two spots in this Sunday’s first round, then the markets on Monday will be pleased because Macron should be able to beat Le Pen in the second round. The polls for a hypothetical Macron-Le Pen match-up in the second round give Macron a fairly comfortable margin of about 63%-37%, according to FT poll tracking.
The candidate that seems to have the best chance of knocking Macron out in the first round, however, is Communist-backed Jean-Luc Melenchon, who has surged in popularity just in the past several weeks. Melenchon’s support of 19% is only 5 points behind Macron’s support of 24%. A Melenchon victory in the first round would likely set up a second-round contest between the two extreme anti-EU candidates of the far-left Melenchon and the far-right Le Pen, with either outcome being negative for the markets.
If Macron were to be knocked out in the first round by Fillon, by contrast, the result would not be as negative for the markets since Fillon is a mainstream candidate. However, Fillon would have a tougher time than Macron in beating Le Pen because Fillon has been tainted by the corruption allegations of misusing public funds by giving his wife and children fictitious government jobs. The polls give Fillon a narrower margin of 57%-43% in a hypothetical second-round match-up with Le Pen.
Sunday’s first round vote is close enough to be up for grabs and the markets will have to be ready for anything on Monday morning. Not only are the four top candidates tightly bunched together in the polls, but about a third of voters say they are still undecided and those undecided voters could break in any direction.
If either Le Pen or Melenchon ultimately become the next French president, the markets would likely face a 5-year term of renewed Eurozone instability. The European stock markets will likely sell off sharply and risk measures will rise. However, a victory by Le Pen or Melenchon would not be the end of the world because opposition parties in both cases would control the French parliament. That means that parliament could block the new president at nearly every major turn.
Moreover, even if a French referendum is held on whether to stay in the EU, polls suggest that French voters favor staying in the EU by a narrow margin. A biannual Eupinions survey in late 2016 found that 53% of French would vote in favor of staying in the EU. The odds of France leaving the EU before 2025 are only 23%, according to Oddschecker.com. Still, holding a French referendum on whether to stay in the EU would be highly destabilizing for the European financial markets due to the uncertain outcome.
The betting odds on who will be the next French president are 58% for Macron, 29% for Le Pen, 15% for Melenchon, and 12% for Fillon, according to PredictIt.org. Macron’s odds have dropped about 15 points since late March due to the surge of Melenchon and the chance that Macron could be knocked out in the first round.
The French-German 10-year bond yield spread is currently at 73.8 bp, which is only -5.4 bp below the 4-1/2 year high of 79.2 bp posted on Feb 21. The current French 5-year credit default swap price of 60.2 bp is down by -12.7 bp from 3-1/2 year high of 72.9 posted on Feb 23 but is still twice the levels seen in late 2016.
UK snap election announcement sparks sharp sterling rally — UK Prime Minister May on Tuesday called a surprise snap election for June 8. Ms. May is seeking to capitalize on the 20 point lead that Conservatives hold in the polls to bolster her majority and make Brexit easier. Sterling on Tuesday rallied sharply by +2.2% and posted a 6-month high on ideas that a larger Conservative majority would strengthen Ms. May’s hand in the Brexit negotiations and possibly lead to a softer EU exit by allowing her to sideline the more extreme Eurosceptics in the Conservative Party. Meanwhile, the FTSE-100 index on Tuesday fell by -2.5% to a 2-1/2 month low due to the sharp rally in sterling and increased the uncertainty ahead of the June 8 election.
Beige Book will be watched for any explanation of weak consumer spending — The Fed today will release its Beige Book survey of the U.S. economy ahead of the May 2-3 FOMC meeting. The market is discounting only a small 12% chance for an FOMC rate hike at that meeting. The last Beige Book report, released on March 1, said that the U.S. economy expanded at a “modest to moderate pace” from early-Jan to mid-Feb. The markets will be watching today’s report for any explanation of the weakness in consumer spending seen in Feb-March.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a -2.0 million bbl decline in U.S. crude oil inventories, a -2.0 million bbl decline in gasoline inventories, a -1.0 million bbl decline in distillate inventories, and a +0.3 increase in the refinery utilization rate to 91.3%.
