Image source: Express

Emmanuel Macron’s victory in the first round of France’s Presidential elections sent investors flooding into the euro and sent Eurozone stocks soaring. Europe’s single currency hit a five-month high as fears of a showdown between the far-right and far-left gave way to hopes for a more stable outcome in the EU’s second largest economy. At 23.9%, Macron edged ahead of the Nationalist Front candidate Marine Le Pen, who pulled second place with 21.4% of the vote.

The two will face each other in the runoff elections May 7th, and investors are pricing in a solid win for Macron. Both Le Pen and Macron advocate for comprehensive change for France, but their views on how to effect that couldn’t be more different. Macron, a centrist who formed his political party just last year, is a determined supporter of the European Union and open immigration – seeking changing processes rather than comprehensive reform from the ground up. To the opposite sits Le Pen, who is anti-Islam, anti-immigration, and wants to hold a referendum on pulling out of the EU.

Macron has captured the endorsements of both of the establishment parties whose candidates were eliminated in round one. Former frontrunner François Fillon had a simple message to his constituents: not the far-right. Capturing these votes would support the expectation for him to expand his narrow lead against Le Pen from just over two percentage points in round one to 20+ in round two, especially as fellow euro skeptic Jean-Luc Mélenchon, the extreme left candidate, declined to back either candidate.

The perceived security of a Macron win has given investors an appetite for risk, ready to abandon their safe haven diets to gorge themselves on riskier assets. The Japanese yen declined alongside gold and US Treasuries as traders scale back their bets of a possible Le Pen win.

The euro’s spike higher was a move we were expecting to see should Macron emerge victorious in the second election. Paired with the price action in safe havens today, this endorses the view of widespread investor confidence. That being said, having a deck that is stacked in Macron’s favor introduces the risk of a significant upset. Whenever traders are overweight on one outcome, the possibility of another, however remote, has potential to be extremely disruptive to markets.

After the defeat of Geert Wilders in the Netherlands, this vote could be seen as further confirmation that the rise of global populism has come to a halt; but calling this a confirmation may be premature. Although Macron is expected to win in the final show down, Europeans are far from happy with the status quo. 40 percent of the French electorate backed anti-European advocates on both the left and right. While Macron may be perceived as too ‘middle-of-the-road’ by those who want to see dramatic change, Le Pen may lean too far to the hard right to attract the votes she needs. If Macron wins, he will need to ensure that the more temperate changes he proposes address the concerns of the discontented.