Macron Victory Eases European Political Risk
May 08, 2017
Financial markets will welcome the election of centrist, pro-European Emmanuel Macron as France’s next president. Now that Europe has avoided a major political upset, all eyes will be on the European Central Bank (ECB) and its next move.
Macron’s comfortable win in Sunday’s election will be greeted with relief by financial markets. His reformist agenda is much more business-friendly than the protectionist, anti-globalization policies espoused by his opponent, far-right Marine Le Pen. And Le Pen’s hostility to France’s membership of the European Union (EU) and the euro could have challenged the stability of the single currency and, ultimately, the EU’s political cohesion.
Markets had started to price in a Macron victory before the vote because of his wide lead over Le Pen in opinion polls. Nonetheless, the news is likely to be taken positively, give a boost to the euro and lead to a further reduction in the premium that investors demand to hold French government bonds instead of their German counterparts.
Victory for a mainstream, pro-EU candidate will certainly be greeted with relief and enthusiasm in Brussels, too. Whether or not Macron will be able to reform France and relaunch the European “project”—as claimed by his most ardent admirers—is a different matter, though. A recent opinion poll suggests that he may be able to gain a majority of seats in June’s crucial parliamentary elections. But neither this, nor Macron’s willingness to take on France’s vested interests, is certain.
Immediate Political Risks Recede
Sunday’s result should also lead to a temporary reduction in European political risk. The only other important events on Europe’s political calendar this year are France’s parliamentary polls, Britain’s general election (also in June) and Germany’s federal elections in September. None of these is likely to be systemically important. The next globally significant European political event is probably the Italian general election, but that’s more likely to take place next year.
All Eyes on the ECB
Now that Macron has won, we expect investor attention to focus on the ECB and the growing likelihood that it will either announce or begin to taper its quantitative easing (QE) program in the second half of the year.
This process should start in June, with the ECB shifting its risk assessment to balanced and possibly removing the easing bias in its forward interest-rate guidance. This is likely to put upward pressure on Bund yields and the euro and provide a more challenging backdrop for peripheral bond markets.
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