According to surveys, less than one month ago the extreme left candidate Jean-Luc Melechon had been ranked fifth in the race for the office of President of France. However, latest surveys indicate that he’s only 3-4 percentage points away from two of the leading candidates. If Melenchon and the extreme right candidate, Marine Le Pen, make it to the second round, the market may be disturbed on Monday. A commentary from Marcin Lipka, Cinkciarz.pl senior analyst.
Over the past few months, investors have been analyzing potential consequences of Marine Le Pen’s victory in the French presidential election. However, these analyses were purely theoretical. Despite that surveys were indicating a minor victory of the extreme right candidate in the first round, the estimates for the second round were indicating that she would lose by 15-30% to her potential opponent. Therefore, the chances for her eventual victory would be minor, even taking into consideration the recent mistakes made by the survey centers regarding Brexit and the US election.
However, the negative scenario has become increasingly likely. Jean-Luc Melenchon has been gaining increasingly larger support. Currently, he’s only 3-4 percentage points away from two of the leading candidates (Marine Le Pen and Emmanuel Marcon). Moreover, his results are becoming equal with the results from Francois Fillon. His economic plans are considered negative by the market, just as the plans from Le Pen.
Similar view on economy
Even though ideological views from the extreme left candidate are completely different than those from Marine Le Pen, their economic programs, as well as their attitude towards the European Union, are quite the same. According to The Financial Times (FT), Melenchon wants a thirty-two hours working week, plans to increase fiscal expenses by 250 billion euros, impose a tax on those whose annual incomes are higher than 400k euros and decrease the pension age to the age of 60.
Moreover, according to Reuters, Melenchon wants France to leave NATO, as well as the International Monetary Fund. He also wants to deprive the European Central Bank of its independence, devalue the euro and renegotiate the EU regulations regarding savings. If Melenchon doesn’t succeed in the discussions regarding the latter topic, he would call on a referendum for leaving the EU.
Le Pen also wants to decrease the pension age, leave NATO, as well as the eurozone, and increase space for fiscal expenses. Moreover, she plans to limit migration moves and force traders to maintain established prices for French products.
Incredible results of extreme left
At the end of March, support for Melenchon was at the level of 11%, which was approximately 8 percentage points worse than that for Fillon and more than 10 percentage points worse than support for both Marcon and Le Pen. With such a poor result, he wasn’t even considered in surveys regarding the second round.
Nevertheless, support for the extreme left candidate has been increasing. According to FT, he can currently count on a 19% support. One of surveys indicated even a 22% support for Melechon. Support for Le Pen, as well as for Marcon, has been at the level of approximately 23%.
What’s interesting is that surveys regarding the second round have been giving Melenchon quite large chances to defeat Fillon, as well as Le Pen. The only candidate that could defeat him is Marcon.
Relief or fear
In conclusion, Le Pen’s participation in the second round is not the largest threat for the markets. Investors are mostly anxious about the second round rivalry between Le Pen and Melechon. The second round between Melechon and Fillon would be as negative for the markets, because the likelihood of Melechon’s victory would be bigger.
If one of the above mentioned scenarios is fulfilled, the markets may experience a large increase in the aversion risk on Monday. This would cause the zloty to lose value, particularly against the franc and dollar.