Euro’s Advance Signal Relief at French Vote Though Risk Remains

(Bloomberg) —

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Emmanuel Macron’s bigger-than-expected lead in the first round of French presidential elections brought immediate relief to markets worried over a victory for his nationalist rival Marine Le Pen.

The euro rose in Asian trading as foreign-exchange markets opened for the week, after early estimates showed Macron had a vote share of almost 29%. That was good news for investors, who had feared a closer contest and a support surge for his rival. Euro Stoxx 50 futures pared opening losses to trade around 0.1% lower by 8:53 a.m. in Singapore, broadly in line with U.S. stock futures.

Read More: Macron Set to Face Le Pen in Runoff for French Presidency

Despite the euro’s buoyancy, markets may continue to be cautious for another two weeks as Macron and Le Pen seek to build a broader coalition of voters in a one-on-one contest. The incumbent’s victory isn’t certain yet, especially as some traders worry votes from trailing candidates such as Jean-Luc Melenchon and Eric Zemmour may go to Le Pen. All that Sunday’s results may have done is to reduce the prospect of panic selling.

“The numbers are quite encouraging,” said Andrea Cicione, head of research at TS Lombard, referring to the poll estimates. “There’s a significant gap between Macron and Le Pen. So if that gets carried over to the second round, that looks like quite a good development for markets, especially bond markets.”

The euro jumped as much as 0.7% to $1.0954 at the start of Monday’s trade before giving up most of those gains to be 0.1% higher on the day at $1.0888. For the advance to be sustained, investors will be watching for signs that 44-year-old Macron can consolidate his advantage and ward off the threat of a Le Pen victory. The yield on France’s 10-year bonds rose to a seven-year high last week on concern Le Pen, with longstanding sympathies for Russia, may take power in the middle of the Ukraine war.

“Macron has a comfortable lead and this is reassuring,” said Alexandre Baradez, chief market analyst at IG France. “He hasn’t won yet and the campaign will be tough in the coming two weeks. But I expect this result, if confirmed, to be slightly positive for the CAC 40 Index.”

Risk Remains

Investors and strategists remained split over what Sunday’s results really meant. While some took comfort from Macron’s lead, others pointed out to the possibility that Le Pen may consolidate anti-Macron votes before the April 24 final round. The first post-results poll gave him only a narrow 51% to 49% margin over Le Pen in the second round.

Read More: Macron Leads Le Pen 51%-49% in Poll Ahead of French Runoff

The combined vote shares of Melenchon, Zemmour and Le Pen showed this was a “a vote of anger”’ targeting the current government, said John Plassard, a director at Mirabaud & Cie.

“The left and the right are gone,” he said. “Now it’s a choice between continuity, with Macron, and the extremes. It’s a shock for French politics. The CAC Index won’t collapse tomorrow but I do expect a bit of pressure on equities and on bonds too because of this.”

Melenchon himself advised his supporters not to vote for Le Pen, while Zemmour told his to back her.

French equities, including banks BNP Paribas SA and Societe Generale SA, were hurt last week as polls showed Macron’s lead narrowing. Equity traders will be watching to see how they receive Sunday’s results, with Macron getting 28.1% to 28.6% of the vote, as against Le Pen’s 23.6% to 24.1%. The margin was wider than polls had predicted. Stocks have outperformed over the course of his tenure.

Read More: Stock Trader’s Guide to French Elections: Winners and Losers

The euro slid 1.5% last week against the dollar to its lowest since the early stages of Russia’s invasion of Ukraine. Negative sentiment in the options market was close to levels seen before the 2017 French election, though that also reflects hedging over the war in Ukraine, inflation and monetary policy.

The close contest has also been driving measures of risk in the bond market. The difference in benchmark French and German yields has risen to the most since March 2020. The equivalent between Italian and German debt, a gauge of euro-area wide sentiment, is up almost 20 basis points this month to around 170 basis points, and the Goldman Sachs Group Inc. team sees it surging to between 180 and 210 basis points if she wins.

Even if Le Pen were to win the presidency, legislature votes in June will determine how much of her agenda she can get through. A strong showing in both of these could see the euro slide below parity against the dollar for the first time in two decades, according to Nomura Holdings Inc. strategists, though that remains an extreme scenario.

“Macron must now pay attention and his camp must remain mobilized,” IG’s Baradez said. “Some voters could think it’s a done deal and the risk is abstention. He needs to pay attention: he hasn’t won yet.”

(Updates with stock futures in second paragraph.)