As was widely expected, the second round of the French Presidential election yesterday saw Emmanuel Macron win by a comfortable majority, gaining 66% of the votes cast to 34% for Front Nationale’s Marine Le Pen. At 75%, the turnout rate was the lowest since 1969 when George Pompidou was elected. Attention now switches to the national assembly elections in June to see if Macron’s En Marche party can gain an overall majority, or whether they will need to form a coalition with another party. Traditionally there is a significant boost for the party that wins the Presidential election in the assembly elections, but it’s harder to call this time given that Macron doesn’t represent one of the established parties. The only opinion poll published so far shows Macron’s En Marche party with a slight overall majority. The newly-elected President has campaigned on a reformist agenda, promising firm-level negotiations that may include more flexible working hours and spending cuts to finance simultaneous cuts in corporate taxes. At close to 55% of GDP, French government spending is considerably higher than the Euro-area average of over 46%, and Macron has pledged to cut this to 52%, as well as reducing France budget deficit to 1% by 2022. All this will be music to the ears of Angela Merkel in Berlin, with Macron a strong pro-European leader. What will be less interesting to Mrs Merkel (and particularly Mr Schauble, Germany Finance Minister) is Mr Macron’s promotion of common Eurobonds, which is still very much a no-no in Germany. From a market perspective, much of the anticipated tightening of French government bond yields against German bonds has already happened. What may drive the next leg of tightening is whether Asian investors return to embrace French sovereign bonds as one of their favourite European debt instruments. Those investors have traditionally regarded French sovereign bonds as quasi-German debt but with a higher yield, but they sold large portions of their substantial holdings in Q1 2017 ahead of the elections. Should we see a return of these investors, looking to increase their French holdings, it could drive the French/German sovereign spread tighter.
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