Banks Stick to Market-Friendly Scenario for French Elections

  • Macron seen winning the French presidency against Le Pen
  • Credit Suisse expects a positive outcome for European economy

The French-German 10-year yield spread may have reached the widest since February this week, but banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. are still predicting a market-friendly scenario from the outcome of France’s presidential election.

The yield difference, which has been a barometer for perceived election risk, widened for a third day Tuesday, reaching 78 basis points, the most since Feb. 22. Despite these jitters, strategists foresee a pro-Europe candidate winning the election, with the independent Emmanuel Macron seen beating Front National leader Marine Le Pen in the second round of voting in May.

Most analysts were caught off guard last year, failing to predict the U.K.’s decision in June to leave the European Union, and not forecasting U.S. President Donald Trump’s victory in November. Now, they have another difficult call to make with the French presidential election becoming a four-way contest after the far-left candidate Jean-Luc Melenchon surged in the polls. Still, most banks assign a low probability of an anti-euro candidate winning.

Here a selection of bank’s views on France’s most unpredictable election in a generation.

Credit Suisse Group AG

  • “While the stakes appear high, our central scenario is for not just a neutral, but a positive outcome for France and for the euro area’s economy,” research analysts including Anais Boussie wrote in a note to clients on April 10.
  • The bank’s case scenario is that Macron and Le Pen will move to the second round, with Macron winning. Macron’s strong pro-European stance could even help restart the stalled European engine, and further ease the political risk present in other European countries, according to the strategists. 
  • On the flip side, a scenario with Le Pen versus Melenchon would probably be the most concerning one, likely prompting an immediate risk-off move. Still, the bank sees leaving the euro as “unrealistic” and leading to a very expensive way to default.

Deutsche Bank AG

  • A historical analysis of previous elections suggest that a first-round surprise, defined as Macron or Le Pen not qualifying for the second round, wouldn’t be unusual, strategists including Francis Yared wrote in a note to clients on April 7. 
  • On the other hand, the conditions under which Le Pen could win, conditional on a Macron–Le Pen second round, are extreme, and the polling errors would be well outside of historical norms.
  • The most market-moving scenarios such as Melenchon – Le Pen on the negative side, or Macron – Fillon on the positive side, face relatively high hurdles. However, Fillon qualifying for the second round, or finishing fourth, remain plausible in light of historical polling errors.


Goldman Sachs Group Inc.

  • A victory by a moderate reformist candidate, such as Fillon or Macron, is our European economics team base case, strategists including Francesco Garzarelli wrote in a note to clients on April 10. This scenario would result in a narrowing of French bond spreads, he added.
  • The bank expects French bond spreads and yields to come under upward pressure if the first round of the presidential election were to result in a strong showing of anti-establishment parties such as Le Pen or Melenchon, and recommended its clients to sell futures on French bonds.


JPMorgan Chase & Co.

  • The first-round gap narrows but remains sizable, analysts including Raphael Brun-Aguerre said in a note to client on April 10.
  • The gap between Macron and Le Pen, on the one hand, and Fillon and Melenchon, on the other, remains large.
  • “We thus continue to expect Macron and Le Pen to qualify for the second round,” they added in the note. 
  • The gap between the two candidates for the second round remains large, and continues to suggest that a Macron victory is the most likely outcome.

Morgan Stanley

  • While we still assume Macron will become the next French president, the margin of his expected win will also impact markets, strategists including Hans Redeker, wrote in a note to clients today.
  • The smaller the margin, the bigger the market uncertainties become. A fragmented parliament may put Macron immediately into a ‘lame duck’ position, not sitting well with EMU’s reform needs, they added.
  • France is much more likely to elect a moderate rather than an anti-euro president, economist Daniele Antonucci said in a separate note to clients. He assigned a 15 percent chance of Front National’s Le Pen winning. 
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