The French presidential elections and market stability

Investors are anxiously awaiting the results of the French presidential elections, the first round of which took place over the weekend. Of the four front-runners, none is likely to secure an outright majority, and a run-off between the two leading candidates is expected on May 7.

Expectations are for far-right National Front leader Marine Le Pen and centrist Emmanuel Macron to move forward to the run-off.

Both were slightly ahead of the centre-right Republican Francois Fillon and far-left candidate Jean-Luc Melenchon.

But, as was the case with Brexit and the United States’ presidential election, polls, market watchers and political pundits may be sorely mistaken.

In a close four-way race, we could see any number of permutations around Ms Le Pen, Mr Macron, Mr Fillon and Mr Melenchon. One combination in particular will elicit a great deal of volatility and discomfort in financial markets.

A showdown between the extremes — the right’s Le Pen and the left’s Melenchon — may spark great market turbulence ahead, not least because both have dangled Frexit — France’s withdrawal from the European Union — as a potential outcome of the election. The probability of this outcome is fairly low, but certainly not negligible. Investors beware. Between the two centrist candidates, a Macron victory would likely produce a more benign election outcome that would be positive for financial markets.

Mr Macron’s pro-business policy agenda would bring much needed structural reforms to France and improve the long-term growth trajectory of the country should he deliver on his promises.

His commitment to a stronger European Union could buoy investor confidence in the region and boost Europe as an attractive investment destination.

Politics aside, investors can focus on the economic data due for release. The tug of war between soft and hard economic data continues with the release of sentiment indicators such as the University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index, as well as a slew of other hard economic indicators including durable goods orders and key US inflation metrics.

Sentiment indicators appear toppish, and may recede in the next few months in the absence of any tangible economic catalysts.

That is not to say that growth prospects are dim — the International Monetary Fund had recently upgraded growth forecasts for Europe, the US and China as the on-going economic recovery cycle continues to keep pace.

Growth seems fine but is far from spectacular, and certainly not at rates implied by record-high sentiment indicators.

Amid a dearth of key market catalysts, the disconnect between sentiment and expectation indicators versus actual economic data will continue to be a focus this quarter.

ABOUT THE AUTHOR: Gregory Choy is head of wealth advisory at OCBC Bank