The OAT to Bund spread has receded as Le Pen has fallen behind in the polls, but while her presidency would be by far the worst result from a market perspective, a Fillon victory would not be particularly great either.
The scandal-hit Fillon has fallen away in the polls, but because of France’s two-round system — where, assuming no candidate gets at least 50% of the vote, the two best performers in the first round go into the second — he still has a chance. A very good one, according to Citi analysts.
“Our base case remains a Fillon win (40%), with Macron (35%) very close behind,” they wrote on Tuesday. “Fillon is a stronger candidate due to ‘certainty of choice’, which shows that his supporters are more committed to their choice of candidate. Furthermore, the political pendulum has shifted to the right in the last few years.
“The race for second place in the first round is highly uncertain.”
One might say that either a Fillon or Macron win would be accepted by the markets, with both likely to be supportive for OATs. And also Italian government bonds — with populism on the rise there too, BTPs appear to be impacted by Le Pen’s successes and failures.
But that fails to look at the long-term picture.
One of the reasons for the rise of populism across the developed world is a mistrust of establishment politicians.
Fillon, the very epitome of an establishment figure, would enter his presidency under judicial investigation over payments made to his wife while she was employed as his parliamentary assistant.
The president of France enjoys immunity, but he or she is still in the glare of public scrutiny.
Instead of setting to work on the humdrum of day to day politics (an ever rarer activity in the developed world these days) or on working to take the eurozone economy on its next steps towards full recovery, a president Fillon would be fighting a constant running battle for credibility — an opportunity Le Pen would seize with relish.
She night have to wait five years for another pop at the top job, but the likes of the anti-globalist, Eurosceptic Five Star Movement in Italy would find itself with a very useful target to fuel its own rhetoric. Analysts are already blaming political strife in Italy for rising BTP yields.
Macron may be an untested quantity relative to Fillon, but he should be the market’s choice — better an unknown conventional president than a tarnished one.
