European Investors’ Nightmare as France Votes… UPDATED

Money managers have sold bonds of weaker European economies ahead of the first round of the French election.

Anti-EU French Presidential Candidate Marine Le Pen


By TZ Business News  Staff and Agencies.


France seems set to get a 39 year old banker as President. In a twist of events which dropped  the  far left Jean-Luc Mélenchon out of a run-off against Marine Le Pen, the fight for the French Presidency is now  between Emmanuel Macron and the far right Le Pen who  is described by some analysts as the French Trump.

In France’s most consequential election in recent history, official returns  have shown that voters on Sunday, April 23, 2017,  chose Emmanuel Macron and Marine Le Pen to go into a runoff to determine the next president, New York Times has reported. One is a political novice, the other a far-right firebrand — both outsiders, but with starkly different visions for the country.

The result was a full-throated rebuke of France’s traditional mainstream parties, setting the country on an uncertain path in an election that could also decide the future of the European Union.

It is the first time in the nearly 59-year history of France’s Fifth Republic that both of the final candidates are from outside the traditional left-right party structure. Together, they drew less than half the total votes cast in a highly fractured election.

Even before the official tallies were announced, the political establishment was rallying behind Mr. Macron, warning of the dangers of a victory by Ms. Le Pen’s far-right National Front, though few analysts give her much of a chance of winning the May 7 runoff.

Mr. Macron, a former investment banker, abandoned traditional parties a year ago to form his own movement with an eclectic blend of left and right policies. He campaigned on a pro-European Union platform, coupled with calls to overhaul the rules governing the French economy.

Emmanuel Macron


“The French people have decided to put me at the top in the first round of the vote,” Mr. Macron told jubilant supporters at a rally in Paris. “I’m aware of the honor and the responsibility that rest on my shoulders.”

Ms. Le Pen’s success was a victory for people who oppose the European Union and for those who want to see more “France first” policies to restrict immigration, protect French industry and limit public signs of Muslim faith, including the wearing of head scarves.

“The great debate will finally take place,” Ms. Le Pen said on Twitter. “French citizens need to seize this historic opportunity.”

Political experts said the vote showed a new, profound cleavage in French politics around globalization, as well as France’s relationship with the European Union.

“Fundamentally, this shows that France is going through deep political tensions: clashes over the global economy, the integration of France into the global economy and into Europe,” said Bruno Cautrès, a political analyst and public opinion specialist at the Center for Political Research at Sciences Po, the institute of political studies in Paris.

It is not that the left-right divide no longer matters — after all, voters gave roughly 40 percent of the vote to various versions of the traditional left and right — but that it is now complicated by the crosscutting politics of globalization versus anti-globalization.

With 97 percent of the vote counted, Mr. Macron had 23.9 percent, Ms. Le Pen had 21.5 percent, the mainstream right candidate François Fillon had nearly 20 percent, and the far-left candidate Jean-Luc Mélenchon had 19.6 percent. Earlier analyses predicted the race would be between Le Pen and Mélenchon.


Wall Street Journal recently published fears concerning the French election which started this Sunday, April 23, 2017. Investors are contemplating their nightmare scenario: a choice between far-left and far-right candidates.

In recent days, a surge in opinion polls has placed Jean-Luc Mélenchon, a left-wing firebrand who promises higher wages and fewer working hours, as a potential candidate to move past this Sunday’s first round of voting. That could set up a second-round vote in May 7 with Marine Le Pen, an economic nationalist who wants to pull France out of the euro.

Most analysts still expect a mainstream candidate to make it through to the second round and eventually clinch the presidency. But Mr. Mélenchon’s sudden rise has spooked investors just five days before voting kicks off.

A runoff between Ms. Le Pen and Mr. Mélenchon “would be a disaster for France…[and] a disaster for Europe,” said Patrick Zweifel, chief economist at Pictet Asset Management. Under that scenario, investors would dump the debt of France and of weaker European economies and send the euro sharply lower, analysts say.

Investors recently have been selling French stocks and bonds, and the cost of insurance against a sharp fall in the euro, as measured by so-called one-month risk reversals, hit levels seen at the height of the continent’s sovereign-debt crisis in 2011.

On Tuesday, the spread between French and German 10-year government-bond yields, the most popular measure of election risk, widened to 0.73 percentage point. In mid-March, French debt was yielding 0.57 percentage point more than German debt. As recently as last September, yields were just 0.22 percentage point apart.

For months, investors prepared for a runoff that pitted Ms. Le Pen against a candidate from the political mainstream, either François Fillon, a center-right former prime minister, or Emmanuel Macron, a former economy minister.

Analysts believe that either would beat Ms. Le Pen in a second round, as voters of different political stripes coalesced around a candidate that wasn’t the National Front leader.

But the rise of Mr. Mélenchon has scrambled those calculations. He moved into third place in several polls, passing Mr. Fillon.

French Socialist Presidential Candidate Jean-Luc Melenchon


“The problem is we have a four-horse race where statistically it is a bit too close to call,” said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management. “We’re just sitting on our hands waiting, because we aren’t able to discount a low-probability but high-impact event.”

The prospect of a victory for Ms. Le Pen, however distant, has long spooked markets. Ms. Le Pen’s desire to pull France out of the eurozone has raised concerns that the entire block could unravel.

These worries already have hit the debt of Portugal, Italy and other so-called peripheral economies.

Mr. Mélenchon doesn’t favor exiting the euro, but some policies he advocates would affect the currency bloc. He wants to scrap the Stability and Growth Pact, which limits deficits in the eurozone.

In a runoff between Mr. Mélenchon and Ms. Le Pen, the sort of trading that hit markets during the eurozone’s sovereign-debt crisis, including extreme volatility in the euro and a selloff in the bonds of weaker members, would re-emerge, some analysts predict.

“That euro breakup risk really becomes a tradable theme if it’s Mélenchon versus Le Pen, if you get a battle between the extremes,” said Ned Rumpeltin, European head of foreign-exchange strategy at TD Securities.

Among other policies, Mr. Mélenchon favors granting a sixth week of annual vacation; encouraging a four-day, 32-hour workweek; raising the minimum wage; and reducing the retirement age. These measures would weigh on French businesses and act as a drag on economic growth, analysts say.

To be sure, most analysts believe that, despite the polls, a Mélenchon-Le Pen runoff won’t happen. Even if one does win the presidency, their ambitions could be capped by France’s parliament, these analysts say.

“It’s all very well having a mandate in the presidential election, but you need support in the national assembly too,” said Philip Shaw, an economist at Investec. Elections to the assembly will be held in June.

But a runoff between Mr. Mélenchon and Ms. Le Pen is “still the one scenario that markets will worry about most,” he added. This Story was adapted from an original published by The Wall Street Journal.