100 days to fall out of love – a French romance

The hundred-day mark is an important checkpoint for every presidency. Mr Macron, France’s youngest leader since Napoleon, moved in the Elysée palace after an inspiring campaign which carried substantial political credit. The first days of his tenure went like a dream but clouds have rapidly started gathering around “Jupiter” (Macron has been nicknamed after the king of Roman gods, which is, one might think, more flattering than “Flamby” or “Sarko”).

So what went wrong? The first sign of trouble came with “les affaires” judiciaries which pushed four of Macron’s ministers to resign under questionable circumstances. The Minister of Justice, Mr Bayrou, who was supposed to fight political sleaze has been ironically forced to resign (alongside Sylvie Goulard) under allegations of wrongful use of European parliament assistants. Richard Ferrand resigned under allegations of nepotism, whilst the Minister for Labour Muriel Pénicaud has been weakened by an ethics probe. Then came the crisis with the army over some budget cuts which resulted in the resignation of the general-in-chief Pierre de Villiers, unprecedented in modern times with the last occurrence way back in 1958. The lack of experience of Mr Macron’s party (La République en Marche) in the parliament also cast shadows on the president’s capacity to profoundly reform the country. The icing on the cake has without a doubt been on the social front. The looming reform of the labour market, using rulings in the parliament rather than a vote and a planned housing aid cut triggered the president’s approval ratings to plummet sharply.

After a hundred days only one third of French people (36%) say they are satisfied with the President’s actions compared to François Hollande’s 46% approval ratings in 2012. This is the lowest score by a French president after the first 100 days. To put this into context, this is even worse than Donald Trump’s ratings who is embroiled in the threat of thermonuclear war with North Korea! (amongst many other concerns). The outlook is also worse as only 23% of respondents believe that the country is moving in the right direction compared to 45% in August 2007, three months after Nicolas Sarkozy’s election.

On the bright side, during the state of grace, Mr Macron delivered on some of his most iconic promises. He tore up the old partisan divisions by forming a progressive government and renewing the National Assembly in an unprecedented fashion. He reaffirmed his political priorities through government spokesman Christophe Castaner who wants to “restore the confidence of the people in our democratic institutions, renew our social model, reform our education system, bolster the ecological transition and return to the European promise.” The French president’s first three months were also marked by international issues with visits to France by US President Donald Trump and his Russian counterpart Vladimir Putin. Mr Macron put France back on the map for the rest of the world, by showing an ambitious and progressive political agenda domestically and internationally.

Mr Macron’s next obstacle will be the planned autumn social movements and already represents a tremendous challenge to his authority. It will be fascinating to see how firmly the President will deal with the street reaction as it could already be a cornerstone of his five years tenure.

Since the election, nuances around French politics have not really impacted OAT yields which have instead mostly been driven by Japanese and ECB flows. Pre-election, Nippon investors were amongst those that became net sellers as the Le Pen/Mélanchon risk intensified, pushing the 10 years OAT-Bund spread to widen from 30bps to 80bps. Post-election, they have started buying again and the spread has progressively re-tightened to 30bps. In June, Draghi’s speech at Sintra triggered a sell-off which benefited OAT’s versus Bunds while ECB QE purchases have been increasing towards France (and Italy). At this level, I would be neutral OAT-Bund spreads as they cannot get much tighter and in a risk off event Bunds would outperform.

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Starting the Final Lap

The final lap of the race for the French presidency has started. Emmanuel Macron with 23.75% of the votes and Marine Le Pen reaching 21.53% will compete for the second round of the French presidency on May 7. Voter turnout was 78.69% versus 80.42% in 2012.

French sovereign and corporate bond markets rallied on the back of the first round results and investor political focus will now move to the UK in June and Germany in September.

For the first time under the Fifth French Republic, neither of the two traditionalist parties (Socialists and Republicans) will be present in the second round. The magnitude of this political earthquake is amplified by summing all the extreme votes together, leaving an elevated dispersion in the French political landscape.

After the preliminary results, most of the political figures called to vote for Emmanuel Macron and to form a republican front to preclude extreme ideas reaching the Élysée Palace. Jean-Luc Mélenchon kept his distance and refused to call to vote for any of the candidates.

Emmanuel Macron is the clear favourite for the second round. The polls place him above 60% with a low uncertainty component for his voters (only 8% are not sure of their choice versus 15% for Marine Le Pen). However, his score should be lower than Jacques Chirac in 2002, the last time that the extreme right party reached the final round of the French election.

It is important to note that the polls were extremely accurate, with less than 1% difference for each candidate and the correct order. This is a strong positive for the second round as given the level of accuracy it is hard to imagine Emmanuel Macron losing 20 points to Marine Le Pen.

After the second round, the legislative election will be paramount as the country could end up tough to rule without a majority in parliament. This is the biggest weakness of Emmanuel Macron which could lead to an incapacity to reform the country with every initiative blocked by the opposition.

Official results: French election first round

French politics – where the mud sticks

In France, the National Front is stronger than ever. The rejection of the elites, the international military tensions (Chinese sea, NATO troops in Romania and in Poland) and the effect of globalisation could lead Marine Le Pen to an important score in the looming French presidential elections.

French politics look awful with a peak of mediocrity into the coming elections with all the “affaires” surrounding the candidates. It created some space for some fresh, out of the box, faces like Emmanuel Macron or Benoît Hamon but also reinforced Marine Le Pen (mud only sticks to moderate candidates).

In a tail risk scenario where Marine Le pen gets elected, OATs could widen 20-25%, using 2011-12 as a template to price Eurozone breakup and redomination risks. On the other hand, if the populist candidate does not win, France would outperform the periphery and the focus would move onto tapering.

For now Spanish sovereign debt is not affected compared to OATs, investors seem to only be focusing on French risks and show a disbelief for the dismantlement of the Eurozone. The fact is that even if Marine Le Pen gets elected, she would have a hard time in the parliament election of June and she would not be able to rule as she wishes.

In a positive election outcome, France would need deep structural reform in order to heal and become once again the co-motor of the Eurozone.

Reforms are much needed but they are challenging to implement given the sociological context of the country. One way would be to do a big package of reform simultaneously in order to diversify the pain that they would engender. As the class struggle culture is really important in France pedagogy would be necessary.

On the latest polls (15/03/17), Marine Le Pen remains ahead of the vote for the first round of the presidential election, with 26.5%, followed by Emmanuel Macron (25.5%) and François Fillon (18.5%).  In the second round, Emmanuel Macron is predicted to beat Marine Le Pen, with 61.5% against 38.5%. The socialist Benoît Hamon declined by 0.5 points, to 13.5%, while Jean-Luc Mélenchon is stable, at 11.5%. 72% of the French people wants to keep the euro as the national currency.