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How Grumpy French Liberals on the Trump Train Could Doom a Bull Market

Bradley Keoun

The fate of global markets could hinge on a few grumpy liberals from France.

The leading candidate in the country's upcoming presidential election is Emmanuel Macron, who previously served as economy minister under center-left President Francois Hollande. Though he's running as the candidate for his own year-old party, En Marche!, he's seen as the investor-friendly choice, with his pro-European agenda and pledges to cut taxes while still reducing stubbornly high budget deficits.

Yet he's young, at 39, and has never run in an election. He's a former Rothschild investment banker, in a country where investment bankers are widely despised. More damaging, perhaps, is his reputation as the safe, establishment candidate, in a world where the past year has produced underdog-style election surprises like Britain's exit from the European Union and Donald Trump's victory in the United States presidential race.

Distaste for Macron might be so great that some blue-collar workers of hard-left political leanings simply sit out the election or cast a protest vote. And those might go to Marine Le Pen, a far-right politician who has pledged to ditch the euro as France's currency, reject trade deals and impose strict caps on immigration. A win by Le Pen, while still seen as a longshot, could roil markets worldwide as investors increasingly worry that the European Union would eventually break up -- shaking the global order.

Jonathan Fenby, managing director of European political research for the London-based investment consultant TS Lombard, uses the French word "morosite," roughly translated as "gloominess," to characterize the dynamic.

"A lot of the left dislike him intensely and see him as a traitor," Fenby said of Macron during a conference call with clients on Tuesday. "It's the grumpy brigade."

The potential for France to pull away from the European Union's common currency -- known colloquially as "Frexit" -- comes amid a wave of nationalism around the world, backed by voters looking to unseat establishment-minded politicos seen as managing affairs to suit the economic interests of the elite. At least one money manager, Morgan Stanley's Ruchir Sharma, says the world is entering a multi-decade epoch of "deglobalization," triggered by populist backlash against the increase in international trade, migration and capital flows that took place from 1970 through 2008.

Bond traders have responded to the risk of a Le Pen victory by bidding up France's credit-default swaps, or CDSs -- financial instruments used to bet on a country's likelihood of default. Prices for five-year French swaps have almost doubled in the past six months to about $55,000 per $10 million of debt. By comparison, similar contracts on Germany cost about $18,500.

According to TS Lombard, a come-from-behind win by Le Pen could spark a sell-off in stocks and risky assets in Europe that likely would spill over to global markets. The European Central Bank could be forced to step up its tens of billions of euros of monthly bond purchases, in a bid to preserve regional economic growth.

Le Pen, 48, of the National Front Party, is the daughter of former party leader Jean-Marie Le Pen, who in 2002 won the first round of French presidential elections before losing in a runoff to the unpopular center-right incumbent, Jacques Chirac.

The younger Le Pen would be France's first female president. While she's tipped to place in the top two spots in the first round of French elections on April 23, she's seen by most observers as too extreme to defeat front-runner Macron in a runoff that would take place May 7. (The center-right Republicans' candidate, Francois Fillon, is embroiled in a nepotism scandal, while Benoit Hamon of Hollande's Socialist Party has been dragged down by defections and divisions among the left.)

Even so, just as many Trump supporters cast their votes based on anyone-but-Democratic-nominee-Hillary-Clinton appeals, France's Macron could see his chances spoiled by a similarly styled revolt, according to TS Lombard. Macron, who served as economy minister under Hollande from 2014 to 2016, upset many Socialist Party loyalists when he quit to form En Marche!. 

Some 37% of potential voters haven't decided who they'll vote for in the first round of elections, providing an additional wild card to the reported poll results, Fenby said.

Based on the latest surveys, Macron would garner 64% of votes in a runoff versus Le Pen. 

But only about 45% of Macron voters say they actually plan to vote, contrasted with the 75% of Le Pen supporters who say they will show up, according to Fenby.

And the deciding votes could come from disenchanted liberals who decide to "bring the house down and vote for Le Pen," he said.

It remains to be seen whether they play that trump card.

Editors' pick: Originally published April 3.

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