Article / 25 April 2017 at 14:48 GMT

French toast?

Head of Trading / The ECU Group plc
United Kingdom

  • French first-round presidential vote triggered sigh of relief across markets
  • Unlike UK and US voters, the French voted as opinion polls had suggested
  • Around 48% of the vote went to anti-establishment candidates
  • France's June parliamentary election key to president's ability to govern  
  • Likely next president Macron will face big challenges to reform economy
  • Trump expected to announce tax-reform plan as soon as tomorrow
  • US and Canada clash over new tariff on Canadian lumber exports to US
  • ECB's Draghi likely to stick to "steady as she goes" approach this week 

Emmanuel Macron
 Centrist politician Emmanuel Macron's first-round presidential election victory 
set off a wave of relief in financial markets. Photo: Shutterstock


By Neil Staines


“We can only see a short distance ahead, but we can see plenty there that needs to be done” — Alan Turing, English computer scientist, mathematician, logician and cryptanalyst 

The first round of the French presidential election this past weekend highlighted a number of significant developments with implications for France, Europe and the financial markets.


After the surprise outcomes of the UK referendum on membership of the European and the US presidential election last year, the French outcome was almost exactly as the polls had predicted for some time. Perhaps the French electorate are more honest in opinion polls than their British or American counterparts. Maybe they have a more uniform demographic distribution. Perhaps the surprise is yet to come?


The failure of France's two establishment parties to secure a run-off place between them is another key indicator of discontent with the status quo across the globe. Indeed around 48% of the vote went to anti-establishment candidates.

It now seems unlikely that the centrist candidate Emmanuel Macron, who won the first round, would fail to secure the presidency when French voters cast their ballots in the second round on May 7. But, without the backing of an established political party, it remains unclear that Macron will have the platform for change. In that regard, the French parliamentary elections in June may be more significant as they will determine his potential to govern.

For now the financial markets have breathed a sigh of relief at Macron's first-round victory, with equities and risk assets sharply higher, intra-Eurozone sovereign spreads narrower, and implied volatilities lower. In many regards, we are completely comfortable with this market reaction, as "insurance policies" against the worst potential outcomes are unwound.


However, we would caution against any extrapolation of the "Macron effect". France has a deeply troubled economy, in need of stark structural reform. Following the apparent rejection of the establishment, Macron has a relatively short term to bring about change: he must boost employment, growth, productivity and reduce the size of the state (French government spending as a percentage of GDP is higher than that of Greece, at ~56%), national debt, disquiet. Failure may lead to a more extreme candidate next time. 

“The only thing that hurts more than paying an income tax is not having to pay an income tax” —Thomas Dewar, Scottish whisky distiller

With the first round of the French election out of the way, financial markets' attention likely turns back to the US and president Donald Trump. On the fiscal side, Trump is expected to announce at least an outline of the much-awaited Trump tax plan as soon as tomorrow, with White House officials briefing Congressional Republican leaders today. News reports suggest a dramatic cut in the corporate tax rate to just 15% from the current 35%. In the short term, this would likely be a strong fillip for corporate America, generating a substantial repatriation of US corporate holdings abroad (profits, divestitures, capital,...).

In the bigger picture, however, a corporate tax cut of this scale could cost the Treasury around $2 trillion at a time when Federal budget deficits are expected to keep rising. More imminently, with a Friday deadline, it risks a government shutdown, by adding more complexity to the debt-ceiling debate. 

The White House

 The White House could present a tax-reform plan as 
early as Wednesday. Photo: Shutterstock


On the trade front, Trump has turned his attentions to the North, announcing a tariff on lumber imports from Canada of between 3 and 24.1%. Unsurprisingly, Canada has condemned the “unfair and punitive duty” and threatened legal action.

Hold one’s horses

The European Central Bank's governing council meets on Thursday, and some commentators have suggested that ECB president Mario Draghi may adopt a more hawkish tone at the press conference following the market-friendly French vote. But we think he is likely to stick to a cautious "steady as she goes" approach this week, at least until Macron crosses the finish line. Draghi is likely to dodge direct questions as to timing of rate hikes relative to the timing of the bank's completion of its quantitative easing programme and instead focus on the continuation of modest economic recovery, amid maintained downside risks.

On the data front, GDP data from the UK and US (as well as France and Spain) will be key focal points and, with the current near binary risk profile of financial markets, the Bank of Japan's meeting will also likely hold sway.

In the near term, we would expect the recent rise in the US yield curve (boosted by the risk profile, supported by Trump) to support the US dollar, particularly against euro and the yen. But while the UK has been relegated to the middle pages of financial press, we still favour GBP over EUR from here.


— Edited by John Acher

Neil Staines is head of trading at The ECU Group 


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