21.04 Weekly Viewpoint : The first round of the French presidential elections will be held on Sunday

The first round of the French presidential elections, which will be held on Sunday, 23 April, is at once of highly uncertain outcome and rife with implications for European markets……

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Intesa Sanpaolo – Research Department For professional investors and advisers only

The first round of the French presidential elections be held on Sunday, 23 April, and will yield the names of the two contestants that will run for the presidency at the ballot stage on 7 May. This time around, the outcome of the first round of the vote seems highly uncertain, as voting intention polls assign four candidates shares of consensus that differ by no more than four points, according to some surveys. Considering a typical margin of error of around 1.5-2 points, and the large share of undecided voters, the probability of one of the weaker candidates (Mélenchon or Fillon) reaching the runoff stage is low, but not negligible.

This uncertainty is by no means devoid of implications. Significant market reactions may be triggered already by the specific pairing of candidates that will ultimately reach the runoff stage. Two candidates (Macron and Fillon) have presented electoral manifestos that may be considered as reassuring for the markets. By contrast, those set forth by Le Pen and Mélenchon both contain markedly destabilising elements, such as a propensity to step up public spending, the intention to introduce protectionist measures, and above all, a certain allergy to the single currency, openly admitted by the two candidates, albeit with different tones and motivations, but which could prompt the markets to price in a certain degree of redenomination risk if one of them get elected. Of the various possible runoff pairings, the most favourable in terms of the market’s foreseeable immediate market reaction would therefore be a Macron-Fillon challenge, which nonetheless does not seem likely to materialise (as at would imply that poll are strongly overestimating consensus for Le Pen, and strongly underweighting consensus for Fillon). Vice versa, a Le Pen-Mélenchon runoff would trigger an immediate and violent negative reaction, mitigated only by the hope that cohabitation with a moderate prime minister would keep redenomination risk low, and prevent the implementation of the more radical measures. The probability of this combination (which has not been priced in at all, at the moment) is equally low; however, the greater loyalty of the Front National electorate (core supporters estimated at 20%, two points above Macron), and the possibility that Mélenchon may still not have fully exploited his potential reservoir of votes, afford this combination a slightly higher probability than the previous. Polls on voting intention indicate that Mélenchon would win against Le Pen, but that many moderate electors would abstain from voting at the ballot stage. Given this scenario, the June legislative elections would become of the utmost importance: should electors deny the president a parliamentary majority, the disruptive potential of his left-wing manifesto would be attenuated by the need to reach a compromise with moderate political forces. The likeliest scenario, i.e. a runoff between Le Pen and Macron, would theoretically keep the market on edge. In any case, polls on the outcome of this specific runoff offer solid indications that Macron would win, and may therefore be enough to reassure investors even before the outcome of the second round is known. A Le Pen-Fillon runoff, while unlikely in light of recent survey data, would garner a similar reaction – while probably advising greater caution among investors. This is also the scenario which could see the highest number of abstainers, as left-wing electors would be faced with two almost equally “indigestible” candidates.

Uncertainty on the outcome of the vote is amplified by the fact that, at the beginning of this week, around 30% of the electors who are sure they will vote declared that they may still change their minds before Sunday. Uncertainty is low among supporters of Fillon and Le Pen (<20%), and has decreased among those intending to vote for Macron (26%). However, over 40% of electors who declared their intention to vote for Hamon are not sure of their choice, and may ultimately choose either Mélenchon (potential estimated by BVA at 23%) or Macron (potential of 30%, well above Le Pen).

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