April 24, 2017

French result bad for Brexit Britain

French result bad for Brexit Britain

Bill Blain discusses the results of the first round of the French Presidential election, and explains their implications for France, Germany and Brexit Britain. 

What was all the fuss about? Macron polled highest at 23.9 per cent in the first round of the French presidential election, and looks like a sabot-in for the second round. Le Pen must know her 21.4 per cent of the vote probably represents her high tide in this cycle – she is unlikely to pick up many of the established party votes, and turnout was high.

We might be able to worry less about ‘Populism’. Le Pen didn’t get the ‘undecided’ votes her bid depended upon. The massive swing towards a ‘populist’ Front National vote never happened.

The hedge funds who were rumoured to be shorting France on the expectation of an electoral shock – for instance Le Pen poling 30 per cent plus in the first round – are the ones with oeuf on their faces this morning. There were several well-placed stories last week about hedge funds mining the ‘big data’ thrown up be the social media and concluding a shock was on the cards as pollsters under-reported ‘populist’ voting intentions.

Predictably, Europe has soared on the result. A committed European notionally in charge of France? Tick! A committed European without a domestic power base? Maybe an issue… But the Euro is up, and was looking like a relief rally driving a stronger stock market. A few weeks ago, I had a “concerned” seller of a very decent block of French Semi-Sov guaranteed debt at a very realistic price, but I doubt they will be so motivated to sell this morning.

‘Le Spread’ between Bunds and Oats ratcheted in 20 basis points this morning, before settling around +17.  Why hasn’t it tightened further? Perhaps the realisation that the end of the French election wobbles put all the other Euro concerns back in play: how the European Central Bank will play the end of quantitative easing later this year and its ‘taper’ – which will have huge implications across European bonds and spreads. (June will see the ECB give us Forward Guidance on how it will likely pan out.)

Or is the market already anticipating what a Macron Presidency will/can achieve to repair France? New party and new ideas? Will he really be able to reform the labour market? That is a dark can of worms no French president has successfully opened.

And we won’t know what effect he will have on European unity until we get the German elections out the way later this year. They say Macron has smashed the establishment, or is he just the establishment in another guise? Without a solid party mechanism behind him, he’s going to have to wheel and deal with Le Establishment to achieve much over the coming years. Let’s see what really happens after the national elections. I suspect the truth is they are merely ‘out the way’, and little has really changed.

Of course, there’s still room for a shock from Paris – perhaps Macron saying something profoundly stupid or an outrage playing into Le Pen… but that bottle of wine I bet with a client that Macron would win is looking increasingly safe!

The bottom line on France and markets is the immediate threat might have been removed to the Euro, Europe, bonds and stocks. However, nothing in France is fixed yet. The likely new president faces an uphill struggle to establish himself, and the Front National has not gone away. There is a sizable minority in France that will continue to press for Frexit and blame Europe for all the nation’s ills – further alienating the French rural and industrial underclasses. Unless their concerns on the economy and immigration are effectively addressed – sooner rather than later – it remains just a matter of time before we face further ‘Le Spread’ concerns.

It’s worth adding the potential big loser from the likely Macron win could be the UK. Macron is a pronounced Europhile – witness the number of Euro flags at his victory-dance last night – committed heart and soul to ‘Le Project’ and keen to re-establish the Franco-German hegemony across Europe, potentially playing into the arms of Brussels hard-liners looking to punish us for our temerity.

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Bill Blain
Bill Blain
Bill Blain is Strategist and Head of Capital Markets at Mint Partners, a leading agency brokerage owned by, but independent of, BGC Partners. He has over 30-years experience of investment bank and fixed income markets in particular: including spells as head of FIG at Bear Stearns in the 1990s, DCM at HSBC during the 2000s, and the development of new agency brokerage solutions to the liquidity crisis this decade. He is a regular commentator on financial markets. He joined Mint in 2012 to help expand the firm’s ability to provide clients with non-bank liquidity across complex transactions.
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