The French election, held this Sunday, is tightening to within the statistical margin of error, a Deutsche Bank report notes. What could be the biggest risk to the market, an anti-EU candidate being elected, might happen in the first round, with the second round, likely to be won by pro-EU forces – should they make it into the second round. The general election April 23 will result in a run-off May 7 if no single candidate captures over 50% of the vote.

The fear of markets is a French election match-up between anti-EU candidates Le Pen and Malenchon

The fear of markets, the black swan, is that radical candidate Jean-Luc Melenchon gets into a runoff with populist Marine Le Pen. Melenchon, who advocates a 100% tax on the wealthy, has nearly doubled his status in the first round of polling.

Recent polling has Malenchon nearing 20% and in a tie with Francois Fillon, Frances former Prime Minister under the country’s largest center-right party from 2007 to 2012. Meanwhile, populist Marine Le Pen is in a tie near 23% with former investment banker and Socialist party candidate Emmanuel Marcon.

 

Le pen victory? French Elections Macron Marine Le Pen France
Le pen victory? By Gauthier Bouchet (Own work) [CC BY-SA 3.0], via Wikimedia Commons
With polls narrowing, the concern is that the second round leads to a Le Pen – Melenchon match-up, which pits two anti-EU candidates in the race. If Le Pen were to face Marcon, Marcon is expected to win by a wide margin of near 20%.

French election likely to have market impact

Deutsche Bank thinks the force of trend Melenchon’s risk has waned.

“Further decline in Hamon’s votes is unlikely to support Melenchon to the same extent as it did in the last three weeks,” Strategists Francis Yared, Abhishek Singhania and Jack Ki-Lizia wrote. “However, the more important point is that the risk around the first round persists as (a) the top 4 candidates are within the historical margin of error and (b) the high level of undecided voters increases the uncertainty of the outcome.”

This all impacts markets, of course.

Melenchon’s rise in the polls has been one of the key market drivers since the end of March, and it is having a particular impact in the sovereign debt market, as spreads between Germany and France have been widening and are expected to widen significantly if the second round ensures an anti-EU candidate will win.