Why have markets reacted well to the first round of the French presidential election?

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I've heard that markets have reacted well to the first round of the French presidential election, in which the National Front candidate and a centrist, mainstream candidate got through to the second round.

Assuming that the market is mainly worried about a president who's going to upend the status quo for the current economic system, how has this first round changed anything?

Andrew Grimm

Posted 2017-04-25T12:27:48.893

Reputation: 12 460

7They are happy that Emmanuel Macron is likely to be the next French President (60% in his favors in the recent polls), and Macron is very liberal, economically speaking. – Taladris – 2017-04-25T12:59:41.670

If anyone can answer that, they're not going to tell us. Predicting the stock market is a super valuable secret! – None – 2017-04-26T02:08:27.200

Answers

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Stratfor's latest podcast (or here) addressed it in detail, but at root level it's very simple: the markets were pricing in (due to closeness of polling and other polling-related factors) the worst-case scenario of the two winners being right-wing Euro-skeptic Marine Le Pen and left-wing Euro-skeptic Socialist/part-time-Communist Jean-Luc Mélenchon.

In such a worst case scenario (from market's point of view) either of the two winners would be bad; so runoff round would be a choice between bad and worse.

The outcome of the first round was, instead, the much better scenario of market-friendly centrist Macron running (and, as per 538's analysis, most likely winning) against Le Pen; leading to Macron presidency. The markets like that it's not one of the two bad options in the first place, and Macron's general market-friendly policies and background don't hurt.

Aside from the above practical consideration, markets probably also reacted in part to the "well the Euroskeptic populism is now less on the rise than everyone assumed after Brexit and Trump".

user4012

Posted 2017-04-25T12:27:48.893

Reputation: 84 347

1So if Le Pen wins the elections we can expect a knee-jerk reaction in the markets. – Pale Blue Dot – 2017-04-25T20:04:42.843

3@PaleBlueDot Not necessarily. Here in the U.S the markets would drop every time Donald Trump went up in the polls, and rallied every time Donald Trump fell in the polls before the election. Despite this pre-election behavior, the markets have rallied over 10% since Donald Trump's election. The take away from this is that over the short term, the markets are very inconsistent and irrational. – AxiomaticNexus – 2017-04-25T21:14:23.317

Yeah. That was a big lesson indeed. Institutional investors must have had their money ready which they started pouring in after Trump's win (markets love capitalists after all!). But retail investors/traders didn't see that coming I guess. – Pale Blue Dot – 2017-04-25T21:22:16.553