How Has the Bond Market Reacted to the French Election Result?

While the chances of a Marine Le Pen election win were always overstated, the rise of populism in the UK and the U.S. meant that nothing could be taken for granted. After all, conventional polling had already been largely discredited by Brexit and the election of U.S. President Donald Trump, and while Dutch populist Geert Wilders failed in his own bid for power he may now form part of a government coalition in the Netherlands.

The rise of populism, along with protectionism and aggressive foreign policy, has certain triggered widespread volatility in the financial markets. More specifically, traders have adopted an increasingly risk-averse approach and sought secure stores of wealth in the build-up to every major election in recent times, and the latest French instalment was no exception to this rule. Now that Le Pen has been defeated, however, it is worth appraising the outlook for the market in France and across the globe.

A Look at Bonds: How Has the Market Changed Since Macron's Win?

Back in February, the market was becoming increasingly unsettled at the prospect of a Len Pin win. As she performed well in the polls, we also saw a huge increase in the demand for French government bonds, which offer a relatively low-risk and secure store of wealth during volatile times. In fact, an estimated 16 billion Euros of French government bonds were traded on a daily basis during the second month of 2017, which was more than double the average value recorded during the previous year.

To put this into context, it is similar to the levels recorded during the 2010-2012 Eurozone sovereign debt crisis, when a number of member states became insolvent and threatened to trigger the collapse of the single currency.

According to Oanda, however, the aftermath of Macron's win saw a sudden and expected shift in sentiment. Almost immediately, French 10-year bond yield tumbled by an impressive 11 basis points, marking their best daily performance in nearly four months. With yields now having fallen to 0.82%, the financial market as a whole has clearly rebounded on the back of greater security and the election of centrist, pro-European (and not to mention globalist) leader.

While the Euro was actually down by 0.1% at $1.0992 after Macron's triumph, for example, the impact of his expected election win had already caused the single currency to rise by 3.5% against the U.S. Dollar over a 30-day period. Similarly, demand for the Japanese Yen (which also serves as a risk-averse option alongside low-risk bonds and gold) also tumbled by 0.2% and is set to fall further. Euro stocks showcased similar results, as they have grown incrementally in recent times despite dipping slightly immediately after the election results were announced.

The Last Word: Can Macron Rejuvenate France?

For now, all of the key indicators suggest that Euro stocks and the single currency will continue to rally against the dollar and the pound in the near-term. Whether this can be sustained depends on the performance of Macron and his ability to unify and polarised nation, along with his capacity for driving democratic and economic reform in the European Union.

If he can realise these pledges, we may well see longer-term stability in the global financial markets and a partial end to the rise of populism in traditionally democratic nations.