Panic over – for now

OK, drama’s over.

The French election has turned out pretty much exactly as expected. For all that some of the papers are leading with “French revolution” headlines, the reality is that a face-off between the right-wing Marine Le Pen of the Front National and independent/socialist candidate Emmanuel Macron of En Marche! has been on the cards for months now.

So what happens now? And what does it mean for your money? 

It looks as though Macron will win the French presidency 

Emmanuel Macron, the French Tony Blair, won about 24% of the votes in yesterday’s first round of the French presidential election. Marine Le Pen, the French Nigel Farage, won around 22%.

They go through to the final round on 7 May. The rest of the candidates are out of the race.

Who will win? The polls say Macron. The markets also say Macron. The euro has leapt to a five-month high this morning. Bond markets are calming down – spreads across the eurozone region are tightening (for example, the gap between what it costs France to borrow money, compared to what it costs Germany to borrow money, is shrinking). Stocks are likely to go higher too.

You might say: “Ah, but what about Trump?” and plenty of people have. I take your point – I’m a sceptic by nature, I don’t have a particular dog in this fight, and I’d never say never.

But sometimes the market and pollsters do get things right. And it does look highly likely that Macron will beat Le Pen in the second round.

Firstly, polls suggest a large gap. He’s on 62% versus 38% for her, and this sort of gap has been consistent across the election process. Secondly, the other candidates have largely now said: “Back Macron”.

Things can change, of course. Macron might not come across well during the debates. He might take all this for granted and be surprised on the night. His policies aren’t all that well defined, for a start.

Then again, Le Pen might be good on the rhetorical side, but she’s got her own tricky policy questions to answer. The sticky issue of currency is one that has derailed nationalist ambitions in the past (the Scottish independence referendum is a good example), and Le Pen’s idea of taking France out of the euro will give a lot of her own supporters pause.

So as it stands, I don’t think the market’s view of their relative chances is wildly complacent in the way that it was about the odds of Brexit and Donald Trump winning. That doesn’t mean that Le Pen can’t or won’t win. It just means that the odds look realistic, rather than overly discounting one outcome.

It’s also worth noting that at one point, both Le Pen and Macron would have been viewed as political “surprises”. Neither are mainstream candidates. I know I’ve compared Macron to Tony Blair, but Blair led a traditional party. Macron has created his own party (and I’m sure some of Jeremy Corbyn’s beleaguered New Labour hostages must be looking at him and thinking hard).

So regardless of who wins, this is an anti-establishment vote. France has voted for change. The big theme running through financial markets and political circles hasn’t stopped here – it’s just that in France, an anti-establishment globalist looks likely to win, rather than an anti-establishment nationalist.

The wider market doesn’t really care about French election details

Of course, whoever wins, they might struggle to get their agendas heard. The French parliamentary election in June comes hot on the heels of the presidential second round. As anti-establishment candidates, neither Le Pen nor Macron have particularly large power bases within the establishment.

So what does this mean? Well, it’s the usual story. You might have someone who’s ostensibly in charge, but has to make so many compromises with parliament, that any reforms are kept watery and weak.

But putting it bluntly, how France is governed is neither here nor there to most of the rest of the world, as long as it remains, broadly speaking, “business as usual”. Stick with the euro, play nice with Germany, and the rest will take care of itself.

So as long as Macron does win come 7 May – and it seems likely that he will – then the biggest (currently scheduled) political frightener of the year is over. Italy could still throw a few spanners in the works, and that would certainly rattle markets, but the biggest systemic risk now looks as though it’s on its way to being put aside.

That is all likely to mean a rebound for the euro (which we’ve seen already), a rally for eurozone stocks (which fund managers are itching to buy at the moment in any case), and attention returning to the US economy, and Trump’s travails.

On Trump, apparently we’ll be hearing the outlines of a big tax reform in the US on Wednesday – according to a weekend Tweet. If we do, then combined with the market-friendly French election result, it could be just what we need to get us over the current wobble and onto the next round of the bull market.

If not – well, US markets will have to start justifying their valuations somehow. But that’s a topic for another morning.