A second term for President Macron would be welcome news for the Euro area
While President Macron has yet to officially say he will run for a second term, the announcement is expected any day now. The majority of opinion polls put him way out in front. He is followed by three candidates with not much separating them, including Valérie Pécresse, the candidate of the conservative Les Républicains party, and two candidates from the extreme right wing.
The odds are in favour of a second round run-off between Emmanuel Macron and the conservative candidate or a far-right candidate, with the polls pointing to a comfortable win for the incumbent in round two.
The markets are therefore not expecting a surprise risky outcome, but are positioning for Macron to win another term, a result that would be positive for the bond and equities markets in the euro area. A second term for President Macron could reassure sovereign bond markets, which for the past few days have been pricing in more hawkish moves by the ECB towards a normalisation of monetary policy.
The markets reacted with higher volatility to expectations of monetary tightening. Mere days after the ECB meeting, the German 2-year bond yield hit its highest point since 2015, climbing back above pre-Covid levels and even recovering all the decline registered since the ECB launched QE in March 2015.
In another more worrying development, the spread between the 10-year Bund and the 10-year BTP (Italian government bond) widened to 160 basis points at the start of February, the highest since Q3 2020. While the gap between the largest and third-largest economies in the euro area is not in the danger zone at these levels, it does bring up bad memories: of 2011, when the spread shot up to more than 550 basis points during the debt crisis, and 2018, when the spread widened to more than 300 basis points.
A second term for President Macron would send a positive signal to southern Europe, and to Italy especially. The current government’s “pro-growth” economic policies are more in tune with the economic policies of Europe’s southern member states than the more fiscally cautious north, including Germany – especially now that the German Finance Minister has indicated a shift in fiscal policy back to a balanced budget after the pandemic.
Talks on the euro area budget due to start in the next few months will be crucial for the bond markets as the ECB winds down its bond-buying programme. And a strong emphasis on supporting growth in Europe, combined with a degree of fiscal flexibility, would boost both the equities and bond markets, especially after the “risk” of Mario Draghi leaving office has been removed.
Political stability in France and Europe would also be positive, in terms of timing, relative to the economic situation in China. There are wide expectations that after the Winter Olympics, China will loosen its “zero Covid” policy, a move that would help ease tensions on global supply chains and reduce inflationary pressures in Europe and the US. China is also expected to introduce additional economic and monetary support measures.
A “no-surprises” French election outcome would boost the CAC 40, since improved economic visibility in Europe coupled with a rebound in Chinese economic growth would combine to create momentum in European equities, especially in the luxury sector which accounts for a large percentage of the total weighting of the CAC 40.