Having been blind-sided by the Brexit vote and Donald Trump's election, financial markets were relieved that lighting did not strike a third time in France. Had Marine Le Pen been elected, the reaction on markets would have been swift and brutal, but the success of Emmanuel Macron had been so well flagged that reaction has been pretty muted.
The euro eased back having hit its highest level since November against the US dollar and French equities also eased back. In truth, the big moves had come after the first round vote in late April, which convinced investors that Macron was going to win.
In terms of France, and French politics, attention will now turn to the June elections for the National Assembly, to see in Macron is likely to be able to push ahead with his reform agenda. He has promised to reform France's antiquated labour market rules and its tax and pensions system, and cut regulation, but has signalled that he hopes change will be steady rather than dramatic.
However the reaction on the markets yesterday was evidence of the old market saying “ buy on the rumour,sell on the fact.”
Investors had already priced in a Macron victory and acted on this. And so some took profits when it happened. But this short- term impact is only part of the story.
The victory of the middle-ground in France – and the Netherlands – removed one key worry for investors at the start of the year. This had held back the euro and European equity markets in the early months of the year. Le Pen had promised to take France out of the euro, for example, and her election would have led to huge market uncertainty. Euro dramas may not be over – and in particular investors remain nervous about Italy, where elections are due by next March – but one significant bullet has been dodged for the single currency.
Now attention will turn to the generally positive figures – such as the latest data for German industry – and the implications for growth and equity prices and for euro zone interest rates.
The Brexit talks remain a huge political issue of course , and the German elections come in the Autumn, but in the meantime attention will turn to the flow of economic data and in particular what this means for ECB policy. No-one expects an early increase in ECB interest rates, but the ECB is to start winding down a key aspects of its monetary stimulus – its massive bond buying programme – and debate will now intensify on when and how this should happen.Germany, in particular, is uncomfortable with the scale of bond buying and wants it to be wound down.
The French election had been seen as a key marker in the financial, as well as the political, year, in an era where markets are being driven by political events. With it now out of the way, the way is clear – for example – for the AIB flotation to go ahead . In these turbulent times, political risk has not been removed from the financial markets.
But the French election results has removed one threat which has hung over the markets for months now. Whether it is a turning point in European political fortunes is, of course, another question entirely.
