Macron and Le Pen will run for the French presidency

Centrist candidate Emmanuel Macron and far-right candidate Marine Le Pen will face one another in the run-off for France’s presidency on May 7.

Although a Le Pen win cannot be ruled out, current polls suggest that Macron is well placed to become president. We therefore cut our estimate of the probability of a Le Pen victory from 40% to 25%.

This first-round result is likely to be judged favorably by global markets, given Le Pen’s lower chance of winning and the elimination of left-wing candidate Jean-Luc Mélenchon. The euro gained as much as 1.9% in early trading, hitting USD 1.093 and its highest level since the day after the US presidential election in November.

Investor risk appetite looks set to improve when European markets open. This should support growth-sensitive assets, including our existing overweight positions in US and global equities. And given expected falling demand for safe havens, our portfolio should benefit from our recent decision to take profit on an overweight position on 10-year US Treasuries versus US dollar cash. Market sentiment could also brighten following comments from US Treasury Secretary Steven Mnuchin that the US economy is “well positioned for growth” under the Trump administration.

CIO is also underweight euro high yield credit in its tactical asset allocation. The first-round result is unlikely to push yields down further – they are already close to record lows.

In currencies, we are overweight the euro against the US dollar in global portfolios. We expect EURUSD and EURCHF to stabilize in the 1.08 to 1.10 range, before eventually breaking higher toward 1.12 if Macron wins the run-off. Currency markets have moved quickly to price in the lower probability of a Le Pen victory.

Nevertheless Le Pen could still win over more moderate voters by toning down her anti-EU message and capitalizing on her perceived strength on national security matters following recent terrorist attacks. And Le Pen could also benefit if many mainstream voters stay home, and her highly motivated supporter base heads to the polls.

Given our positioning into the election and a significant pre-market move, we make no changes to our global asset allocation at this stage. But over the coming days, we will monitor closely the opinion polls, both candidates’ detailed policy manifestos, and measures of volatility in case market mispricing or new investment opportunities arise.

Mark Haefele – Global Chief Investment Office – UBS Wealth Management