24 APR


The opinion polls ultimately proved accurate. As expected, Emmanuel Macron and Marine Le Pen have qualified for the second round of the French presidential election, securing results close to the predicted levels. There was therefore no Trump or Brexit effect and the likely election of Emmanuel Macron has dissipated the prospect of a European implosion. A few weeks after the Dutch elections and ahead of the UK legislatives, these results therefore provide a response to the fears of a rise in populism.

Markets welcomed the news positively, with a 14-point squeeze in the OAT - BUND spread, as the euro rallied by more than 1%. The likely election of Emmanuel Macron is effectively being perceived as a victory for Europe. Despite the fact that 8 out of the 11 candidates had intended to renegotiate the European treaties, Emmanuel Macron is the candidate most strongly in favour of European construction and should prove to be an astute negotiator in the Brexit discussions. This result also marks a victory for liberalism. Through the planned reforms regarding pensions, the employment market and the civil service, Emmanuel Macron is expected to enhance flexibility, while also reducing the French deficit. The OAT- BUND spread may therefore tighten further and approach its level prior to the election. Asian investors are therefore likely to move back into French debt securities, which have been largely neglected since the beginning of the year amid fears triggered by Marine Le Pen and Jean-Luc Mélenchon.

Against this backdrop, Mario Draghi now has free reign to progressively adapt his stance, starting at the June monetary policy committee meeting, by marking out the path towards tapering monthly purchases. Although no other changes are expected this week, the recent divergences within the ECB have hinted at a possible reduction in the repurchase programme. Last week, 60% of economists were expecting an announcement to this effect in September, whereas only 50% were anticipating a possible base rate hike during Q3 2018. A Macron victory provides leeway for greater tightening than anticipated. We believe that the euro is likely to strengthen and German rates steepen progressively, despite Mario Draghi wishing to avoid this scenario.