French election: Forget politics and focus on the economy
Macron win enables markets to relax from reduced Euro zone or EU break-up risks and benefit from the improving economic backdrop, writes David Kohl, Chief Currency Strategist, Julius Baer
As expected in our baseline scenario, independent centre-left candidate Emmanuel Macron has finally emerged as the next French president after he garnered 66.1 per cent of votes cast in yesterday’s second-round run-off of the presidential elections 2017. The Macron win was the outcome anticipated by financial markets and came with an even larger margin than indicated in the last voting intention polls. The opposing candidate, right-wing populist Marine Le Pen (33.9 per cent of votes), failed to narrow the gap in the short time available for campaigning since the first round on 23 April. With the election now finally decided in favour of euro- and EU-friendly Macron, political risks that had weighed on European markets - particularly risks associated with Euro zone disintegration or EU break-up - can now be set aside for some time. In France, the legislative elections (11 and 18 June) will gain less attention, although the loss of influence of the formerly established republican and socialist parties may continue.
The question will rather be whether Macron’s “En Marche!” movement will get enough representatives in the national assembly and find support among the centre and left parties for him to follow through with the announced economic reforms, enabling him to increase the competitiveness of the economy over the longer term. In any case, the risk of the populist National Front gaining substantially in the national assembly has now diminished. Furthermore, the German parliamentary elections in September will likely be decided between Merkel’s CDU/CSU and the socialliberal SPD, with recent local elections in Saarland and chleswig-Holstein turning out favourable for Merkel. The EU-critical “Alternative für Deutschland” has only little approval in polls and will hardly be able to achieve a critical share in parliament. Therefore, investors should be able to enjoy some calm for the next few months, as European markets will acknowledge fewer European break-up risks and will be able to profit from the tailwinds of benign economic data – at least until the Italian elections, due in 2018, come into focus.
Furthermore, the euro will also be able to benefit without political drag from the improving economic backdrop. Euro zone gross domestic product (GDP) grew 0.5 per cent quarter-on-quarter in Q1 2017, more than double the pace as in the US. Forward-looking indicators such as purchasing managers’ indices (PMIs) and credit dynamics are also stronger in the Euro zone than in the US. We expect this strength to be a support for the euro going forward, as it feeds the speculation that the ECB will scale back some of its extraordinary stimulus. Hence, we adjust our three-month forecast to 1.11 EUR/USD. The interest-rate advantage of the US dollar is the biggest hurdle for a stronger euro and given the Fed’s apparent readiness to hike rates in June, this cap remains in place for the coming months.