Macron's Likely Win a Positive for Markets

The first round of the French elections is complete with two candidates advancing into the second round: Emmanuel Macron with 24% of the votes and Marine Le Pen with 22%. Voter turnout was average, which ultimately favored Emmanuel Macron rather than the feared Marine Le Pen.

It is very likely that Emmanuel Macron will be the next French President after the second round of elections on May 7, 2017.

This is a distinct positive for the market: French and periphery spreads will tighten significantly, as the tail risk of breakup is flushed from asset valuations. The euro is already trading up over 1%.

Emmanuel Macron – Relatively Unknown

Emmanuel Macron, 39 years old, was relatively unknown to the public just three years ago. He was Minister of the Economy for two years ending in 2016 at which point he started his centrist party En Marche! He is business friendly, wants to cut payroll taxes and improve education, raise defense spending, but most importantly he is consistently Pro-European. Macron’s economic strategy involves a "new growth model" using €50bn over five years in new investment and reform to fund (oddly familiar?). He wants to reduce public spending by over €60bn per year by the end of five years and favors a Eurozone parliament.

His priorities are somewhat light on detail but the general thesis is clear: pro-European and business friendly is what a market likes.

Parliamentary Elections are Critical

If Macron wins on May 7, then he will need parliamentary support to push an agenda. His party, En Marche!, will hope to gain a majority of the 577 seats in the two-round parliamentary elections on June 11 and 18. If En Marche! cannot secure a majority, then the resulting "cohabitation" between En Marche! President Macron and a prime minister of another party could make it more difficult to push through a market friendly agenda.

Still, Something is Amiss in France

If Macron is President on May 8, then the near-term risks clearly subside simply based on his distinctly pro-European policies. Still, something is amiss as the two Eurosceptic candidates, Le Pen and Mélenchon, jointly capture over 40% of the votes. Globally populism is "a thing" with the exact reason baffling even the most dedicated global policy makers. A guess points to likely macro and micro factors pushing populism. On the macro front, global wealth inequalities, technology, "globalization", and the rise of lower-paying service sector jobs are all candidates that could be driving populism trends. But on the micro front, even egalitarian France has political skeletons: a large population of North African migrants, sharp declines in public sector and manufacturing employment.

Unless Macron makes good on his threat to reform in relatively short order, the rumblings of disenfranchised people could emerge again over the medium term.

Looking Forward

As the risk associated with the French elections is likely to pass if Macron ultimately wins, then the next set of elections slated in Europe will take more center stage: German elections in September and Italian elections likely early next year. Our view is that the German elections will be something of a non-issue. Merkel and her CDU/CSU party have gained lost ground against the opponent, SPD, and coincidentally the right AfD lost its momentum as it struggles with leadership. Italy is the larger risk with elections likely early next year and a popular Eurosceptic Five Star Movement.

The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security.  Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish).  These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information.  Please contact Standish for current information about our views of the economy and the markets.  Portfolio composition is subject to change, and past performance is no indication of future performance.
BNY Mellon is one of the world’s leading asset management organizations, encompassing BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. Standish is a registered investment adviser and BNY Mellon subsidiary.

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