The Daily Update - French election update

The initial round of the French Presidential election on 23 April is rapidly approaching and it is increasingly looking like it will be a nail-biter right until the final run-off between the two leading candidates on May 7.  Polls suggest the contest still remains open between four candidates: According to the Kantar Sofres poll at the start of the week Emmanuel Macron and Marine Le Pen lead with 24 percent of the vote and are followed by Jean-Luc Mélenchon who has been gaining ground with 18 percent of the vote.  He is now ahead of François Fillon with 17 percent of the vote; plus Fillon continues to fight yet more allegations that he put his wife on the payroll 4 years earlier than he had claimed.

The fact that voter turnout is expected to be very low with reports suggesting ~30 percent of potential voters will abstain/not vote/spoil a vote and that Le Pen and Mélenchon are polling in the top 4 is indicative of a large amount of dissatisfaction in society bringing great potential for change.  Moreover, one has to take into account the margin of error the polls have been prone to, and that of the 24 percent that said they would vote for Macron in the Kantar Sofres poll 55 percent of those voters are sure of their intentions whereas 76 percent of Le Pen’s voters are sure of their intentions.

The interesting development has been the pick-up in support for Jean-Luc Mélenchon and the ‘France Insoumise’ movement given the more radical nature of his policies: his campaign is anti-austerity and talks about raising the minimum wage by 15 percent, a 100 percent tax on top earners, withdrawing France from NATO along with a referendum on EU membership.  But with the unemployment rate at 10 percent and youth unemployment even higher at 23.6 percent there is a lot of tension in society and it is easy to see why his campaign is gaining support and likely attracting supporters from the socialist party.  Benoît Hamon, the socialist candidate, has failed to gain significant voter support polling ~9 percent.

The media made much of Le Pen’s recent gaffe: she is reported as saying she did not view France as being guilty of the events in Vel d’Hiv in which Jewish citizens were deported to Nazi concentration camps although President Jacques-Chirac had already acknowledged in 1995 the Vichy Government’s complicity.  She later commented that she ‘fully condemns’ the Vichy Regime and that she considered the French State to be in exile in London at the time.  This incident is unhelpful when the whole campaign has tried to distance her from her more radical father Jean-Marie Le Pen but it may not make much difference in the polls with a high percentage of her voters polling as being sure of their choice.

While the market has discounted a risk of Le Pen reaching the second round vote the base case has been that the most likely contenders against her would be the independent Macron or Fillon and, based on opinion polls, either one would emerge as the winner against Le Pen.  The 10 year OAT-Bund spread is trading around 72 basis points and has widened back to the high end of the 4 year range reflecting greater perceived risk.  Both Mélenchon and Le Pen reaching the second round is not a base case scenario markets have been discounting.  Either candidate would bring negative connotations for France’s relationship with Europe and their more radical policy agendas whereas Macron and Fillon have more pro-European stances.

In France the parliamentary election follows a Presidential election and is due in June.  Although it is now looking unlikely, a Fillon Presidency has the potential to offer more stability in the sense he would have the backing of the Republican party in parliament whereas the other candidates’ parties have less established positions making it less clear how effective their administrations would be.  The 10 year OAT-Bund spread is trading around 72 basis points and has widened back to the high end of the 4 year range reflecting greater perceived risk.

Continental Europe has a number of creditor nations but we continue to prefer US dollar denominated eurobonds offering positive yields thereby avoiding this political risk. Moreover, we see risk from the mounting inflationary pressures in Germany and the Fed in tightening mode making it increasingly difficult for the ECB to maintain such an accommodative policy stance.