A Le Pen upset win would spark selloff in French bonds, euro -fund managers

Investors have discounted Marine Le Pen winning the French presidency on Sunday, so an upset would cause a selloff in French government bonds and dent the euro, fund managers and economists told the Reuters Global Markets Forum.

Polls on Thursday showed President Emmanuel Macron with a lead of between 55.5 per cent and 57.5 per cent for the runoff vote after a prickly debate between the centrist incumbent and the far-right challenger.

The Reuters Global Markets Forum interviews were conducted on Thursday and Friday.

The European Union would not be able to make necessary reforms or joint fiscal efforts without the support of France, which would push the euro lower, said Dean Turner, chief euro zone and UK economist at UBS Global Wealth Management.

“She will not be an easy partner to work with,” Turner said.

Vincent Mortier, group chief investment officer at Europe’s largest asset manager Amundi, gives Le Pen winning a minimal chance. He predicted that French government debt spreads would widen by 50 basis points, equities (.FCHI) fall by 10 per cent, and the euro lose about 3 per cent against the dollar if she wins.

A Le Pen victory could see the dollar rise to 1.065 euros from Friday’s 0.9257 euro, while a Macron re-election would provide mild upside to the single currency, analysts at Citi wrote.

Her proposals to fight inflation have boosted her campaign, but analysts say pledges such as cutting taxes on energy and nationalising motorways would weigh on France’s already stretched public finances.

“There’s no room anymore for fiscal easing,” said Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management, adding that Le Pen’s programme would lead to a surge in public deficit and widening yield spreads.

“Independent analysis of her proposals suggest her policies might end up costing around 75 per cent more than she has estimated,” said Jessica Hinds, senior Europe economist at Capital Economics.

A Le Pen presidency would hold significant risk of diverging bond yields among the different governments in the currency union, said Holger Schmieding, chief economist at Berenberg Bank.

In this scenario, Hinds would expect a selloff in French bonds comparable to that of Italian bonds in 2018, when the Lega-Five Star coalition government was elected.

The gap between Italian and German 10-year government bond yields blew out then by some 200 basis points.

As polls have showed Macron extending his lead, the gap between French and safer German 10-year bond yields has narrowed.

Edmond de Rothschild has an “underweight” position in European equities and euro zone sovereign bonds, primarily due to the war in Ukraine and expectations of monetary policy tightening from the European Central Bank, Melman said.

Amundi is also underweight on euro zone government debt, but Mortier said a Le Pen victory would have “some consequences” on his fund’s allocation.