Upcoming French Elections Scare Investors

With less than a week left before the first stage of the French elections, the race has opened up into a four way near-tie. Currently right wing candidate Marine Le Pen and centrist favorite Emmanuel Macron look set to capture the two spots that will be given the opportunity to progress to the general election in May. However, Conservative candidate Francois Fillon seems to be recovering from a scandal that saw his home searched for evidence of nepotism. And liberals are rallying behind Jean-Luc Melenchon, who has also pledged to review France’s relationship with the EU.

Leaders neck and neck in first round of French elections.

France Fears Far-Left and Far-Right in Elections

Bankers in particular are worried about the implications of a win by either the far-left Melenchon or the far-right Le Pen. With Brexit looming sometime in the next two years, British financial services companies are seeking a new home for a large part of their London based business, due to uncertainty over how EU clients will be treated under British law. Unfortunately, analysts predict that the euro will fall by as much as 10 percent if either Le Pen or Melanchon become President. While the two politicians have completely opposite platforms, both feel that France has become too dependent upon the EU, and seek to renegotiate the country’s relationship with its fellow member states. This places the stability of the euro in question at a critical period.

Leading French Politician Proposes 100 Percent Tax Rate

Melanchon has the added investment risk of being viewed as an anti-business Communist. He recently proposed a 100 percent tax on any income above the equivalent of $425,000. This has encouraged many wealthy French citizens to consider leaving for a more favorable environment, especially given that France already has a higher tax rate than most other European nations. 10-12,000 French millionaires already leave the country every year, many citing aggressive taxation as the reason. Additionally, Melanchon has supported capping CEO salaries at 20 times that of their company’s lowest paid employee, in order to reduce income inequality.

Traders Hope for a Centrist French President

On the other hand, a win by either of the centrist candidates Macron or Fillon would ease the nerves of investors, as both men have shown support for the policies enacted by European Central Bank President Mario Draghi. Until recently Fillon was considered the front runner to win the second round. However, in late February, news broke that Fillon may have paid his family members from public coffers, and even worse that the work paid for may not have been done. Despite pleas from his fellow party members to drop out of the race, Fillon pledged to continue his campaign, a move that may pay off if his poll numbers continue to rebound.

French Elections Encourage Extreme Candidates

The French have a unique election runoff system, in which a large number of candidates enter the first round, and the top two finishers go on to face each other a few weeks later in the second round of elections. This can sometimes allow a more fringe candidate to capture one of the two final spots, while still allowing a more moderate candidate to win the final election. French political experts believe that Marine Le Pen will ultimately take one of the two second round seats, but will likely face one of the centrists, with the public rallying around either Macron or Fillon when faced with choosing between an EU friendly leader and following Britain in dissolving the French membership in the confederation.

How will the French Election Process Affect Trading?

The biggest trading nightmare will be if Le Pen and Melenchon face off against each other in May. Both of their campaigns have focused on ideas that will send businesses away from working with the EU, and away from France in particular. This would cause the London FTSE index to fall, especially with Brexit’s speedy move forward. The euro will almost assuredly fall, and the ECB would need to reevaluate its course if two of the EUs major economic powers withdraw within short succession. The uncertainty would cause gold to rise.

On the contrary, if either Macron or Fillon ends up in the second round, the euro should rise, and gold is likely to fall. The FTSE index would also improve due to the more supportive business environment that either candidate would promote. The pound could also see gains as the centrist candidates are more like to provide good negotiation terms to Theresa May.