Markets Rally on France Election Result
A narrow first-place finish by centrist former banker Emmanuel Macron in the first round of France's election caused Europe and US stocks to rise. Fears of a "Frexit" from the euro lessened despite the #2 finish by anti-EU candidate Marine Le Pen.
By Vikram Rangala
Monday, April 24, 2017 - 00:00
For the first time in the history of the Fifth Republic, established in 1958 by Charles de Gaulle, neither the Republican nor the Socialist party will have a candidate in the final runoff for president. Instead, first place went to Emmanuel Macron, who represented his own new party, En Marche! (Onward!). Second place went to Marine Le Pen, whose National Front party was considered part of a racist, anti-Semitic fringe under her estranged father, Jean-Marie Le Pen, but has since gained support thanks to her more moderate image and ongoing dissatisfaction with the status quo. Whichever candidate wins, France, not to mention Europe and the world, are in for something new.
The euro rallied as much as two percent and closed the European Monday session up 1.2% at $1.0857. Eurozone stocks also soared: France's CAC 40 rose 3.9 percent and Germany's DAX climbed 3.1 percent. Even the FTSE 100 rose 2.1 percent, its weaker showing perhaps attributable to the UK's impending exit from the EU.
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The reaction in European and, later, in US stock markets seems to reflect relief that the likely outcome will not disrupt free trade and the liberal order. In short, the markets seem to think Macron will form an anti-Le Pen coalition large enough to win the runoff election on May 7. An early poll gives Macron a 20-point lead. Investors seem unfazed by some of the facts about Macron: he has never held elected office and he was the economy minister under current Socialist president Francois Hollande, who has a four percent approval rating.
Instead, investors may see him as one of their own: a pro-EU globalist, former investment banker, and graduate of one of France's top schools who speaks fluent English. What some see as positives are precisely the qualities Le Pen is hammering him on. While Macron wants to strengthen trade, lower some taxes, and invest in education; Le Pen's focus is on cutting immigration, abandoning the euro, taxing companies that hire foreign workers, and printing money (presumably francs) to finance an as-yet unspecified set of welfare measures.
Both programs seem designed more for politics than policy at this point, but that's what election campaigns are about. On one level, France faces a showdown between globalism and nationalism. But neither side seems prepared to tackle the serious questions it will face on May 8. Roughly a quarter of France's youth (under age 25) are unemployed and have been for several years, long enough for many to age out of that demographic without ever having held a steady, full-time job. An economic problem like that can define a generation and change a culture and can't be solved either by banning immigrants or by cutting taxes on the rich. Though it does make it easy to understand the frustrations many people feel about policies that appear to favor either the rich or immigrants.
In other words, France, like the US and the rest of Europe, needs more than new leaders and new parties. It needs a new kind of capitalism that is inclusive and not divisive. For now, however, the markets are happy that the euro is likely to remain a viable currency and the EU will get a chance to improve rather than dissolve.
There are likely to be many ups and downs in the months to come, even if Macron wins by a landslide. His odds of defeating Le Pen may be good, but defeating inequality is another matter entirely. Meanwhile, all trades are likely to face short-term fluctuations until a long-term trend comes into view. For Nadex traders, that's good news. Trading with a short-term focus and built-in risk protection is a great approach to markets that are likely to see more volatility once the current sigh of relief ends.
How soon could the feeling of confidence end? No one can say for sure, but the US does face a possible government shutdown this Saturday. Pres. Trump insists that Democrats go along with $1.4 billion in funding for a border wall (the one he claimed Mexico would pay for). Democrats refuse, as do some Republicans, meaning Congress may not be able to pass a spending bill in time.
Trump also plans to announce a major new tax plan on Wednesday. As of Sunday, Treasury Secretary Mnuchin and OMB Director Mulvaney were still giving conflicting statements about whether the tax reform would be short-term or long-term. Congressional leaders said they hadn't been told about the announcement. Some unnamed White House officials cautioned the plan would be a broad outline, without some numbers unspecificied. Saturday marks Trump's 100th day in office
With something as big as major tax reform on the week's agenda, traders may have a busy week ahead. As for the long-term picture, no one can predict it. French observers of the US may look to the Trump administration for clues about what a Le Pen administration might be like, but the bigger question for France is not who will be elected on May 7, but what he or she will actually be able to do for the people who need it most.
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