One Day, You’ll Realize Why These Charts Matter

So this may seem, at first blush, to be a moot point.

That is, no polls show Marine Le Pen standing a legitimate chance of beating Emmanuel Macron in next month’s runoff.

But – and this is one helluva big “but” – the prospects for political gridlock in France remain very real. Consider this out earlier this week from Barclays:

Looking beyond the second round, as we stated previously, we believe the Parliamentary elections will carry more weight than usual, possibly even more than the Presidential election, but the outcome remains uncertain. In light of the statements from senior political figures — particularly from the Republicans, which is the only party in the top four to have a strong local base — parties appear to be intent on pursuing their own parliamentary campaigns, which might suggest that whoever wins the second round run-off will face a substantial opposition, even if that is Mr Macron. This would reinforce our view that a hung parliament is an increasingly likely prospect. The Republican party is set to hold an important political bureau meeting to address its strategy. It will be key to monitor developments given that not all high ranking officials have given the same message, with some calling for “cohabitation” while some others appear more ready to join a national union with Macron, should he beat Le Pen in the second round.

That echoes the sentiments of a reader who regularly updates us with his take on French politics and also underscores a point we made last week. Namely this:

As we and every other commentator have made clear over the past month or so, Le Pen isn’t the only risk here. Indeed, if one of the mainstream candidates does win, it could serve to strengthen the National Front over the long-run if either Macron or Fillon prove unable to, as one official told Politico this week, “break the paralysis and curb high unemployment.”

Similarly, recall this from the latest commentary submitted by the above-mentioned reader (full note here):

Ms Le Pen, to achieve her goal of domination in French politics, must soften her policies to broaden her appeal and prepare for a ‘failed’ Macron presidency.

Well, Le Pen has already moved to do just that, “temporarily” stepping down as FN leader in order to try and unite the French electorate.

The point: “Le Pen risk” isn’t going away. Not for good. And any difficulties Macron ends up having will only serve to strengthen FN’s appeal among an increasingly disaffected electorate.

You’ll recall that one worry – indeed it was the worry – in the lead up to the first round was that if Le Pen put up a stronger-than-expected showing or if the outcome ended up producing a second round combo conducive to a Le Pen victory, there would be a run on French banks. And while that seems to be out of the question now, the following charts are nonetheless worth noting:

(Goldman)

“From June to November 2016, French bank deposits decelerated somewhat at a time when support for Ms. Le Pen was rising (Exhibit 1), although not to a significant extent at the aggregated level,” Goldman wrote on Monday, adding that “this was essentially explained by a decrease in the stock of deposits from abroad, as illustrated by Exhibit 2 (from other Euro area and non-Euro area depositors).”

Now they meant for that to be comforting and to a certain extent it is. But nevertheless, that chart in the right pane quite clearly illustrates that this has the potential to get really problematic, really fast. And while, again to quote Goldman, there’s not currently “any [observable] increase in the TARGET2 liabilities of the Bank of France against the other central banks in the Eurosystem”…

… “the trend could be reversed quickly [on] any new development that increases the probability of a Le Pen victory.”

Again, the point here isn’t to suggest that there’s going to be a bank run in France if Macron’s projected second round margin ticks lower. Rather, you can file the charts shown above away in the “extremely useful information to have at your disposal” folder and we would be willing to bet you’ll find yourself referring back to them sooner or later.

Here’s a bit more useful color from FT:

After starting the year fretting about France’s presidential contest, investors are toasting the prospect of Emmanuel Macron defeating Marine Le Pen next month, spurring significant gains for the euro, European stocks and bond prices.

That is not to assume European political risk is at bay. While investors are convinced that the centrist Mr Macron will comfortably defeat his far-right opponent in the second round on May 7, he lacks the backing of a major party, meaning he must negotiate with France’s National Assembly to gain support for his policies.

Mr Macron is widely regarded as market-friendly, having set out during his campaign some ambitious plans for fiscal consolidation, labour market reforms and increased European political and economic integration.

He aims to implement swift spending cuts to reduce the French deficit, but could swiftly run up against the bruised egos of France’s major parties, for whom the first-round election result was an unprecedented humiliation.