Comment: Forget the French election debate, Hollande is real winner

By Ipek Ozkardeskaya

The second round of the French presidential election is due on Sunday, 7 May, where voters will decide which of independent candidate Emmanuel Macron and far-right rival Marine Le Pen will be the next resident of the Elysée Palace.

Given Le Pen’s radical program vis-à-vis the European Union and the Eurozone, the majority of French citizens are expected to vote in favour of Macron.

The final televised debate on Wednesday night revealed little of interest for the markets, being perceived as nothing more than an aggressive duel between two candidates with diametrically opposed views on political, diplomatic and social matters.

According to the latest opinion polls, 60% of the ballots cast on Sunday will have Macron's name on them, versus 40% for Le Pen.

Current pricing in financial markets suggests a Le Pen win is considered quite unlikely, more so after the fresh fraud accusations that hit the wires following her results in the first round of the election.

Why are some citizens reluctant to vote for Macron?

Emmanuel Macron joined the presidential race as an independent candidate, but is a former government minister, known to have a very close relationship with Jean-Pierre Jouyet, the secretary of state and a good friend of the current President François Hollande.

Many political analysts believe Macron’s rise has been meticulously planned by Hollande/Jouyet, who were well aware of the declining popularity of the Socialist Party under Hollande’s rule and preferred to bring forward a young, good looking and energetic politician before the French voters, who were desperately craving for a new face after ten years under Nicolas Sarkozy’s rule and five years under Hollande’s quinquennium.

Macron is a former investment banker and he is positioned at the center of the political spectrum, which makes him an ideal candidate for France after five years of increasingly unpopular and heavily criticized Socialist government.

In this context, some political analysts believe that the run-of vote between Macron and Le Pen is, above all, a victory for Hollande/Jouyet.

As such, the French election is certainly more complex than what it seemed to many. Therefore, it is important to anticipate which factors might drive market moves after the election?

Euro traders are looking beyond 7 May

The first round has been decisive for traders in the euro. A Macron-win, which has been fully factored into markets, eliminates the possibility of a French-exit from the European Union and the single currency.

Therefore, the euro is not expected to move significantly in reaction to the results from the run-off vote provided, of course that the winner is Emmanuel Macron.

A surprise Le Pen victory on the other hand could take five figures off the euro against the dollar in short order. In time, the euro could fall to the parity on more than justified fears of Frexit.

French sovereigns to win temporary respite

We might expect a temporary relief rally in French sovereign bonds in the wake of a Macron victory.

However, it is important to point out that a Macron win would be just the beginning and clearly not the end of uncertainties regarding the reshuffle of the French government. Triumphant, Macron will need to form a government and given that he has joined the race as an independent candidate, he has no pre-set team.

Therefore, attention would immediately shift to the legislative elections scheduled for 11 June and 18 June.

The main risk is a less-centrist-than-anticipated government, which may be significantly influenced by the exiting Socialist team. Under the latter scenario, we could expect benchmark French sovereign debt to rapidly come under pressure again.

Le Pen has the potential to surprise on the upside

The markets assign Marine Le Pen little-to-no chance of winning the final round of the election. However, a better-than-expected outcome on 7 May might be the deciding factor influencing the terms of the new balance of power under Macron’s lead.

First, we already know that 60% of the far-left, euro-skeptical candidate Mélenchon’s supporters would not vote in favour of Macron. The question is how many of them would vote for Marine Le Pen, who shares some of Mélenchon’s extreme political and economic views.

Second, François Fillon’s supporters feel like they have been victim of a serious injustice and may choose to remain silent or even to vote for Le Pen in order to spite the man responsible for the current, unusual political picture, François Hollande.

For certain, the latter would be a dangerous gamble given Le Pen’s vision regarding the EU and the euro.

Nonetheless, the question remains of how many strategic and/or disappointed UMP supporters will do just that, betting that the Frexit referendum would not succeed and the eventual Front National defeat on the matter would push Marine Le Pen to resign, as she promised, paving the way for an early election.

Hence, the risk is that opinion polls are ignoring the voice of this group of voters, simply because they would refrain from publicly supporting Front National, who might still spring a positive surprise for Le Pen on 7 May.

Ipek Ozkardeskaya is a senior market analyst at London Capital Group