How could Marine Le-Pen become President

Markets seem concerned that a Marine Le-Pen presidency could lead to France leaving the EU. That would be good for gold and bad for French and peripheral debt and Eurozone equities. However, we are more worried about such an outcome in Italy and bookmakers seem to agree.

For those able to avert their eyes from the ongoing pantomime in the US, the most notable feature of the week was a mini-Eurozone crisis, indicated by a widening of peripheral spreads. The widening in previous weeks had been accompanied by a drop in gold, suggesting the problem was a fear of smaller ECB bond purchases. However, last week’s widening came with a rise in gold, suggesting the nature of the problem had changed. Greece is back on the agenda and we suspect the markets are also concerned about larger political issues.

As we have written before, we think the most likely source of real Eurozone trouble is Italy but the epicentre of problems last week seemed to be France.
The spectre of a Marine Le-Pen presidency is haunting the markets, given her desire to hold a Frexit referendum.
Needless to say, if France were to leave the EU and the Eurozone (she wants to bring back the franc), it would probably sound the death knell for those institutions and risk bringing chaos to the financial system (the ratings agencies seem to consider that such a currency change would constitute a default event for French government debt).

Based on both personal experience (ten years living in France) and opinion polls, I think there is little chance that Marine Le-Pen will be elected. Figure 1 shows that her projected share of the vote in the second round (on May 7) has risen to 40%-45%, were she to face Francois Fillon. However, it also shows that she is now more likely to face Emmanuel Macron than Francois Fillon, and that against him her share of the vote has remained stable at around 35% (Fillon’s problems have reduced his chances were he to reach the second round but have also reduced his chances of getting there).

In my opinion, two things need to happen to take Marine Le-Pen to the Élysée Palace (assuming that she will not win an outright majority in the first round on April 23): first, Francois Fillon continues to be dogged by his “jobs for the boys and girls” scandal and that if he withdraws he does so late in the day (opinion polls suggest Alain Juppé would easily beat Le-Pen but he needs time to prepare) and, second, that Emmanuel Macron stumbles and he reveals himself to have little substance beyond slogans.

In all truth, no matter what happens to Fillon, I believe that Le-Pen will be denied so long as Macron does not implode. So, I think our main focus should be on Macron and his campaign. His advantage is that he is a maverick (as was Trump) but that also runs the risk that his support may prove ephemeral (the French now have the example of Trump and can also see the problems that Podemos is starting to have in Spain).

If I were Le Pen, I would focus on trying to destabilise Macron, on the assumption that Fillon is doing a pretty good hatchet job on himself. This will likely focus on his support for the EU and his liberal leanings. If all else fails, and given Putin’s apparent interest in stirring up the democratic pot in western countries, why not call upon him to dig up some dirt?

In any case, I still believe it unlikely that Le-Pen will be elected and bookmakers would appear to agree.
However, the odds of a Le-Pen victory are far from zero and I suspect markets will have many causes for concern between now and May 7. Figure 2 suggests some obvious market reactions if those tensions rise: I think that gold is likely to rise and that peripheral spreads versus German yields would widen (and, of course the spread on French bonds would rise). It is also quite likely that Eurozone equities (especially banks) would suffer, in my opinion.

Nevertheless, given that I believe any such panic on the basis of the French elections would be misplaced, I will be looking to buy on those dips (Eurozone stocks and peripheral debt). As mentioned earlier, though it would be interesting to see what sort of administration Macron would be able to put together, we think the real political problem in Europe will be Italy, rather than France.
This is based on the fact that the Five-Star Movement is close to being the most popular party in Italy and that, if they are involved in the next government, an EU referendum would likely be the result.

Though we cannot always rely on bookmakers, it is interesting that William Hill are offering the following odds on which country will be the next to leave the EU: Greece 2/1, Italy 9/4, France 7/2, Netherlands 7/1….. Given that a Greek departure has been much anticipated, and that we think it would have relatively little broader effect, we agree with the bookmakers and would focus most of our analysis on the situation in Italy this year.

Paul Jackson – Head of Research – Source
András Vig – Director – Source