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Emmanuel Macron French election win has implications for ECB, bonds, say analysts

LiveMint logoLiveMint 08-05-2017 Christopher Anstey

Tokyo: Centrist candidate Emmanuel Macron won a wider victory over the far-right Marine Le Pen than the in the French presidential election, with the latest vote tally suggesting a 66% to 34% result.

The following are selected comments from analysts on the implications for financial markets and economic policies from the French elections on Sunday.

Krishna Guha, vice chairman of Evercore ISI in Washington, said, “This will allow investors to focus on the euro zone’s increasingly solid expansion, relatively attractive valuations (in particularly allowing for operational gearing and weak unit labour cost profile) and risk-friendly central bank.”

“Today’s big personal mandate should help Macron’s efforts to promote his En Marche! candidates and peel off members of established political formations, but there remains a good chance that he will have to ‘cohabit’ with a center-right majority in the Assembly; this could still be productive.”

“The Macron win all but guarantees that the European Central Bank (ECB) will move to a neutral balance of risks to growth and drop its easing bias on rates ‎in June—symbolic steps that would mark the end of the easing cycle—but we still believe the Governing Council will delay the big policy decision on QE to September.”

Francois Cabau and Philippe Gudin, economists at Barclays Plc in London and Paris, said, “The fragmentation of the political landscape implies that the 577 seats of the lower house will be shared by five main political movements.”

Also read: Emmanuel Macron to become France’s new president, in boost to Europe

Initial projections based on opinion polls “suggest that the likelihood of a hung parliament is high, but President-elect Macron may be able to gather a governing majority (possibly an absolute majority or grand coalition), which we believe would enable him to implement his reform agenda to a large extent. It will be key to monitor the split within the Republican Party over the next few weeks.”

“Based on declarations by supporters of President-elect, his initial main priorities concern the simplification of the labour code, and of business procedures, a comprehensive reform of education and vocational training, cleaning up moral standards in the political sphere, and the launch of discussions with other member states aimed at reforming Europe, with a focus on euro area integration.”

Daniele Antonucci and Matthew Pennill, European economists at Morgan Stanley in London, said, “Macronomics begins.”

“The tail risk of ‘Frexit’ is avoided, but a possibly fragmented parliament and a program of moderate reform suggest that the French economy may only be set for gradual change. The market seems to have assumed a fragmented parliament. Even though this is possible, and probably likely, the only recent poll shows that Macron’s party may do well, just like he did better than expected on the preliminary vote counting. We remain cautious, though, as these polls have drawbacks.”

“The market also seems aware that a fragmented parliament may limit the prospects for change. What it seems less aware of is that it’s Macron’s agenda itself that consists of incremental, rather than radical domestic reforms, while it may be overambitious in the near term when it comes to the vision for the monetary union.”

Kit Juckes, a global strategist at Societe Generale SA in London, said, “EUR/USD may pause before the next leg up, having already overshot versus rates and given the risk of profit taking. EUR/JPY should gain, HUF and PLN should gain more,” he wrote, referring to the euro-dollar, euro-yen, Hungarian forint and Polish zloty exchange rates.

Vincent Chaigneau, Ciaran O’Hagan and Marc-Henri Thoumin, rates strategists at Societe General in London and Paris, said “There will be a little extra zest in OATs into the inauguration (most likely 14 May), followed by the formation of a government. That will be followed by a string of decrees or new legislative proposals before the general elections. This ‘honeymoon’ period should help convince any remaining shorts to cover, even at this late stage in the risk rally.” Note that OATs refer to French government bonds.

“We prefer to overweight even higher-yielding credits than OATs now, notably bonos, and more so in the long end,” they wrote, referring to Spanish government bonds. They added that they favour “underweighting BTPs,” or Italian government bonds.

Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney, said, “Macron’s victory is likely to see a re-invigoration of efforts led by France and Germany to further strengthen the euro zone. As such the result is positive for investment markets, particularly French and euro zone shares and the euro. However, with French shares already up 7.4% and euro-zone shares up 6.3% since the first-round election and the euro up against technical resistance after recent strong gains much has already been factored in.”

Sean Darby and fellow equity strategists at Jefferies Inc. in Hong Kong, said, “We remain bullish on France within our global asset allocation. The French equity index trades on a forward PE of 15.2 times, a forward PB of 1.53 times, a forward dividend yield of 3.2% and a forward ROE of 10.1%.” PE refers to the price-to-equity ratio and PB is price-to-book, while ROE is return on equity. Bloomberg

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