We think Macron remains best placed to win the second round, although the vote is likely to be a result closer than in 2017. Although polls have been pointing to growing support for Le Pen in the second round contest, we still expect a broad anti-Le Pen coalition to coalesce around Macron. It also remains important to see how the race and the political debate develop over the next two weeks.
As the far right candidate would receive more attention in the second round, she would be questioned over her links with Putin and the credibility of her economic program that could undermine her. Macron will attract all the undecided voters that fear a populist shift of France under Le Pen, even if they have not voted for the incumbent President in the first round. The re-election of Macron would be welcomed by financial markets, as it would imply policy continuity, further progress on the green agenda, possibly more EU integration, and a renewed attempt to tackle domestic reforms.
However, there is a significant risk of a Le Pen victory, as reflected by polls and markets. Should many of voters abstain in the second round, the chances for Le Pen to win the election would rise. Given that a large share of the far-left electorate has been criticizing Macron, any support from Mélenchon and his voters could be important. Reflecting the narrowing lead for Macron in the polls, markets have also been pricing more risk over the past month, with French government bond yields increasing. The reaction is more limited than five years ago, when the spread of 10Y French sovereign bonds over Germany peaked above 80bp, compared to a high of 55bp this time around.
A Le Pen victory would very likely trigger significant risk-off sentiment around French and many other European assets. Her fiscal plans, if implemented, would put French public finances on a worse footing. Moreover, Le Pen would be ill equipped to assume the leadership over European affairs that Macron has and likely find it harder to work with the German coalition. Unlike Macron, who has strongly pushed for more European and Western integration, Le Pen would likely weaken Western unity and would leave Europe more fragmented with less space to push through Europe-wide investment.
A win for Le Pen poses somewhat less risks than in 2017 given her softening stance on Euro membership. Nevertheless, it would threaten policy continuity and remains a risk off event for markets. Moreover, it is unlikely that Le Pen will be able to reach a majority in the parliamentary elections in June, tempering her ability to push through certain policies even if elected as president. In 2017 her party got more than 20% of the votes in the national elections but less than 2% of the seats in the parliamentary, given the two-round first-past-the-post system tends to favour centre parties. Therefore, she would need to create a coalition with centre parties to form a government, which would involve political compromises.