Legg Mason reacts to French election 2017

Emmanuel Macron’s victory over anti-euro leader Marine Le Pen in the French presidential election removes some of the political risk that had weighed on financial markets so far this year. The centrist candidate’s victory is seen as a positive for European stability, something which supports the global reflation trend that has been building up since last summer. Economic data in Europe, Asia and the US has been improving, underpinning traditional risk assets, such as stocks, and high yield and emerging market bonds. However, today’s post-French election market reaction was muted as the result had been widely anticipated. This is what Legg Mason’s portfolio managers say:
Martin Currie, Michael Browne, portfolio manager: After Macron’s decisive victory, there will be a huge sigh of relief from Brussels and the establishment. But there are huge steps to be taken before he can push through his agenda of de-regulation and social protection. The market’s reaction has been one of relief. The threat posed by the right and left to the French and European economy, has rescinded for another 5 years. If anything this election has masked the real and accelerating momentum in the European economy. Company results and sales have improved faster than expected, optimism continues to rise as does employment. The European Central Bank remains on hold, correctly realising inflation is currently cost-push not demand-pull. A removal of negative interest rates would be a substantial positive and is still years away. We have shifted our focus away from the exporters which have led the recovery, to the European cyclicals. Normally when data gets this good, Europe finds a way to derail it. Whilst there is still the German, UK and possibly Italian election to contend with, the election in France was always going to be the real danger.
Western Asset. Andrew Belshaw, Head of Investments. London The result is in line with the polls, and what they have been consistently pointing to for the last 3 months. Consequently, the market reaction has been muted, with French spreads to Bunds marginally wider this morning. Attention now switches to the French Assembly elections in June and whether or not En Marche can not only become the largest party but secure a majority.