FRENCH ELECTION OUTLOOK FOR FOREX, COMMODITIES AND STOCKS

INTRODUCTION

On April 23 French citizens will cast their vote for their next president. The polls are forecasting one of the closest presidential races in decades, which will most certainly have to be decided by a second round of voting to take place on May 7. The French election process also includes a vote on members of the legislature that will take place in June with its own run-off. Citizens will have to cast four ballots with few guarantees that winning the Presidency will grant a majority and could instead result in a cohabitation of one party winning the Presidency and another the legislature. A third scenario could include the president creating a coalition if no clear majority emerges.

Political uncertainty has increased its influence on global markets after the shocks of the Brexit referendum outcome and the election of Donald Trump. Pollsters were pointing to an altogether different result for both which the markets had already priced in, only to be caught on the wrong side as forecasters had missed the mark.

The French presidential election in 2017 will be one of the closest and given that France is the fifth largest economy in the world it will have investors tracking the developments around the world. The campaign to elect the French president includes surprise independent candidates, as well as a rise of the far-right that has benefited from the drop in the approval rating polls of the current government’s centre-left administration.

IMPORTANT DATES

Sunday, April 23 First round of presidential election

Sunday, May 7 Run-off election if needed

Sunday, June 11 First round of legislative elections

Sunday, June 18 Second round legislative elections

French Election impact on: Currency Markets

The EUR has depreciated versus the USD after the results of the Brexit referendum and the U.S. presidential election as a political signal that voters preferred a nationalistic and closed model in two of the world’s largest nations. The European Union has been under threat as the “exit” option first came onto the radar with Grexit, which was narrowly adverted but set the stage for a potential end of the political and economic union.

The EUR who reached yearly highs of 1.16 in May 2016 quickly lost traction as the U.S. Federal Reserve started hinting at a rate hike at the end of the year and the U.S. growth indicators showed a recovery from the dismal first two quarters of the year. The eventual arrival of the December Federal Open Market Committee (FOMC) with a 25 basis points hike to the benchmark interest rate and a follow up in March of 2017 by another 25 basis points have widened the gap with European refinancing rates that remain at 0 with a negative deposit rate of 0.4 percent.

Marine Le Pen candidate for the National Front has been in the leader’s pack with a high probability of taking part of the second round and the one most likely to push for an exit out of the E.U. for France. Even if she captures the presidency her party has an uphill battle to win the votes needed for a majority and her polarizing campaign make it difficult for other parties to agree to cooperate.

Center-right candidate for the Republican party Francois Fillon was at one time leading the polls only to lose points as a scandal erupted involving government payments to his wife. Newcomer independent candidate Emmanuel Macron capitalized Fillon's stumble. The 39 year-old is focusing on an economic overhaul and has a chance to enter into the two candidate run-off in May where the dynamics could favor his more conciliatory tone that could see him edge out Marine Le Pen.

A Le Pen victory could put downward pressure on the EUR due to her comments, no matter how improbable at this point, on reintroducing the franc and a possible exit from the European Union. A win by another candidate could see the EUR regain some of its strength but still waiting for the results of the legislature elections in June. A Macron presidential win also facilitates a coalition being formed as his platform is easier to integrate for existing left and centre-left parties than Le Pen’s far-right programme.

French Election impact on: Gold^†

The rise of political uncertainty has increased the demand of gold as a safe haven in 2017. The metal touched yearly highs after Brexit, only to steadily depreciate after the strength of the USD after the U.S. presidential elections. The inconsistent momentum of the Trump administration in 2017 has both reduced the attractiveness of the USD and increased the demand for gold.

Gold will likely continue to attract investor flows to hedge against a worst-case scenario where France exits the European Union. The fate of the USD is also another factor to be taken into consideration with a probability of the pro-growth policies promised by Trump being introduced this year boosting the American currency.

French Election impact on: Oil^†

The Organization of the Petroleum Exporting Countries (OPEC) agreement to cut oil production has been the main driver of oil prices this year. The deal, which took almost all of 2016 to materialize, went from a freeze of production to an outright cut as prices kept slipping and a more drastic action was needed. While the cut has been a success with OPEC and some non-OPEC members, most notably Russia, higher shale production in North America threatens the effectiveness of the deal unless it is extended past the original six-month duration.

Crude prices won’t be front and center after the results from the French presidential election start pouring in, but it could be weakened if the outcome destabilizes global markets by introducing more political risk into an already delicate agenda in 2017.

French Election impact on: Stock Markets^†

French markets have been part of the global rise of equities but could face a downtrend if the results of the presidential and legislature elections result in either the exit of France of the E.U. in the long term or a deeply divided cohabitation between the two powers.

A win by Macron or Fillon with a majority or coalition being formed are alternative scenarios that would be welcomed by investors, with a Le Pen victory seen as a risk to markets ahead of the elections.

SUMMARY

The French electorate is heading into one of the biggest elections in history with an uncertain outcome, which has increased the levels of anxiety around the world. The French election system adds to the uncertainty as the two rounds for the presidential and legislature each can make it hard to predict an outcome. First round winners don’t always end up winning it all and 3 in the last 8 presidential elections has been won by the second place coming back in the second round.

Polls have a tarnished reputation after the misses on the Brexit referendum and U.S. election results and there is confidence that this time it will be different which will have investors closely following the French elections during the four rounds of voting.