The French election is like a combination of the GOP primary and the general election because there are many candidates and it has the pressure of a general election. I will provide update articles whenever the election shifts. It seems like it is shifting by the minute which means I have more to discuss. The Brexit set the table for the U.S. presidential election which set the table for the French election. The French election will set the stage for the German election for chancellor in the fall. The question is whether the populist dominos continue to fall.
The general feeling towards populism is it is a negative for the stock market because it brings a tone which seems to be against free trade. Stocks love trade as it helps multinational firms’ profits. It also brings about country specialization which increases productivity. The other risk the stock market sees is uncertainty as regime changes are never smooth. Even in America there have been a few hiccups. However, the risk in Europe is much greater as the European Union is teetering on the edge of failure.
I had previously mentioned that there had been news reports of the left organizing together to have one candidate represent it. With no candidate in the top 3 in the polls, the odds that a left candidate would make it into the top 2 to make it into the second round are low. Because the margin of the election is tight, the candidates in the single digits have considerable power. Who they endorse after they drop out may make the difference in the race. Sometimes after candidates drop out they endorse who they think will win so they can get a good position in the future administration. However, I don’t expect any big endorsements to go the leader in the polls, Marine Le Pen. This because candidates are probably going to endorse based on their political lane.
Part of the reason why Marine Le Pen is leading in the polls now is because she is gaining almost all the right-wing support. You can tell she’s near her ceiling because she usually gets in the low 40s in the head to head polls which preview the second round and she gets in the mid to high 20s in the polls of the first round of voting. They said Trump and Romney had ceilings in their primaries and they won easily. My point isn’t that Le Pen can’t get better results; it’s that she’s not going to get a major endorsement to put her in that situation. It’s possible that endorsements matter less than usual when populism is ruling the day, but every point counts.
When discussing the news of the left possibly joining forces, I said the center could also unite to improve their chances. Because Fillon and Macron both have a chance to make it to the second round, neither will drop out unless a major scandal breaks. The loser will likely endorse the winner in the second round. Whichever candidate gets endorsements from smaller candidates will have the better chance at making it to the next round. This can counter any of the organization the left tries to cobble together.
The latest shakeup in the election is François Bayrou endorsed Macro instead of jumping into the race as was expected. He had run in the past 3 elections, but decided against it because he’s nervous about the fact that Marine Le Pen is winning in the polls. Macron accepted the endorsement as he doesn’t see it as Bayrou trying to influence his policies. Bayrou feels Le Pen is dangerous to the future of France, so he decided to forgo his candidacy. This reminds me of when Lindsey Graham endorsed Ted Cruz. Even though he hated Cruz, he endorsed him because he felt Trump was dangerous.
Bayrou’s endorsement may shock the race and spur the left to get together sooner. Bayrou had about 5%-6% in the polls which means Macron may get a boost of that size. 3 of the past 6 polls were tied between Macron and Fillon for 2nd place in the first round. Macron wins 2 of the past 6 polls and Macron leads 1 poll. The race couldn’t be closer. Obviously if Macro gains 5.5 points and holds that lead until April, he will make the runoff. I don’t know if this boost is permanent, but it helps Macron at a key time because Fillon had been gaining momentum after the news of his nepotistic scandal appeared to blow over.
This switch from Fillon being in second place to Macron being in second place is bad for Marine le Pen because she polls better in the head to head matchups versus Fillon. In the latest poll versus Fillon she loses by 14 points, while the latest poll versus Macron she loses by 20 points. In other news, Len Pen is facing another mini-controversy. Marine Le Pen’s body guard and chief of staff were taken into custody and questioned about the allegations that they were paid for non-existent jobs in the European Parliament. This is the same scandal Fillon faced except the allegations were about his family. He took a hit in the polls for a few weeks and then bounced back. I’m betting Le Pen will bounce back if she takes a hit. There will probably be many more mini-controversies that each of the candidates will have to respond to. Le Pen has called these allegations a political hit job.
Conclusion
The French presidential election is heating up as endorsements and mini-controversies are making headlines. Since the last article, the spread between the French and the German 10-year bond yields has increased one basis point. It is now at 74.5 basis points which is a 4-year high. The latest changes in the race hurt Le Pen which should have lowered the spread which measures risk in the French economy. Unless the poll numbers for Le Pen fall, I expect the spread to rise as we get closer to the election days. This will eventually lead to increased volatility in American equities.
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