How will the French election act as a game-changer?

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How will the French election act as a game-changer?
The business district of La Defense in the northwestern suburbs of Paris. France's fragile banking system can no longer trigger capital flight from Europe and contagion risk.

Dubai - Here are five things to carefully look out for from Paris

By Matein Khalid

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Published: Sun 30 Apr 2017, 7:32 PM

Last updated: Sun 30 Apr 2017, 9:36 PM

The french election is a game-changer for global financial markets for multiple reasons. One, the worst-case scenario of the far-right (Le Pen) and far-left (Melenchon) as second-round candidates for the Elysee Palace on May 7 is no longer a systemic risk. This was the reason the Chicago Volatility Index plunged by an incredible 24 per cent once the Fillon and Comrade Jean-Luc conceded. This was the reason Société Générale, my preferred French bank to bet on a Macron win, surged an incredible 10 per cent in one session on the Paris bourse. Like Sherlock Holmes dog that did not bark, the market's euphoria was based on what did not, but could so easily have, happened.
Two, as the French OAT-German Bund political risk premium compressed dramatically, banks in Italy and Spain became a mathematical licence to print money, as I had predicted in successive columns since March. France's fragile banking system can no longer trigger capital flight from Europe and contagion risk.
Three, Fillon's Gaullists (Les Républicains?) were humbled and Benoît Hamon's Parti Socialiste (the party of Mitterrand and Léon Blum polled a pathetic six per cent!), the twin political pillars of the Fifth Republic founded by the legendary General de Gaulle in 1958, both collapsed in this election. Something profound has happened in French politics if a 39-year-old Enarque with no political party (Louis XIV was 39 too, though too dumb to be accepted at ENA!) and zero deputies in the National Assembly could be the next president of France.
Four, Mark Twain was right. History does not repeat but it surely rhymes. In 2003, Marine Le Pen's odious Papa reached the second round before the French establishment held its nose and rallied around President Chirac. Fillon and Hanon have now thrown in their support for Macron, the next anointed republican monarch! This is best possible scenario for the EU, the euro, the ECB and even the Swiss National Bank, who no longer has to brace for another 2012-style surge in the Swiss franc. A Greek debt deal is also now a slam dunk.
Five, President Macron on May 7 (it ain't over till its over, Yogi Berra warns us!) will greatly increase the prospect of Chancellor Merkel winning the German election in the autumn. After all, Berlin no longer has to anchor a eurozone on the brink of catastrophe, as could well have happened had Le Pen won the French presidency. Political risk shall be less of a sword of Damocles on the financial markets now that France is no longer the epicentre of systemic geopolitical risk in Europe, as it was in 1789, 1792, 1804, 1815, 1830, 1848, 1870, 1940, 1958, 1968, 1981 and, yes, 2017! Vive la République (the fifth one since the Great Revolution, to be sure!).
Macron's acolytes in the Banque Rothschild may find it premature to reach for the monk Perignon and the widow Clicquot. The legislative elections in June makes it certain that Macron and En Marche will have to "cohabit" with a prime minister from the (hopefully) centre-right. This could generate political and fiscal malaise in the heart of Europe - and, yes, resurrect the CAC-Quarante bears! Like Trump and Boris, Macron has scaled the political Mount Olympus via a movement, not a party.
The French election was a steroid shot for the value of euro-dollar, now just below 1.0935 as I write. The euro has now completed the classic Fibonacci retracement of its losses since Trump's election win last November 8. I would not be surprised to see the euro retest its May 2016 high of 1.1610 (seems so long ago in the Stone Age before President Abu Ivanka!). Yet this can only happen when Macron wins the second round on May 7 and imposes his policies on the National Assembly this summer. So the real metric of risk I track is the French OAT - German Bund 10-year government debt spread, narrowed by 20 basis points since April 24. Dr Mario Draghi will not accede to German, Dutch and Finnish demands for higher policy rates while positioning on the long euro trade is a bit crowded. This means the euro's path higher will not be linear!
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.


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