Friday, April 21, 2017

Don't (at this point) Fear Frexit...

I want to get out in front of the French election for you, just in case. Why? Because probabilities suggest that should Marine Le Pen and Jean-Luc Melenchon (the nutcase I referred to in this week's message) emerge the victors in Sunday's first-round voting, global markets will take notice -- in un-pretty fashion.

Up until very recently, the polls showed market-favorite Emmanuel Macron having little trouble in round one. Today's surveys have it a near 4-way dead heat. And round one is clearly the danger zone.

As polls currently stand, if it's Macron and LePen surviving Sunday, Macron would win the May runoff handily, and, thus, the markets (probabilities say) would be a-okay.

So what if it's Le Pen and Melenchon? Then, based on today's sentiment, it'll be Le Pen winning in May.

So why are markets afraid of Le Pen? Because she promises that -- after, first, 6 months of negotiating -- France will be saying au revoir to the Eurozone. And that would be messy (much more so than Brexit) -- and put the EZ's future in serious question -- for sure!

But here's the thing -- per the following by Bloomberg's Maxime Sbaihi -- a National Front Party presidential win does not nearly a winner make: (emphasis mine)
If Le Pen becomes the eighth President of the Fifth Republic, she will then need to secure parliamentary support to govern. In France, Parliament consists of two chambers: the National Assembly and the Senate, which pass legislation and have the power to bring down governments. While the President appoints the Prime Minister and ministers, the government needs to be confirmed by a majority vote in Parliament. The problem for Le Pen is that her Front National party currently holds only two of the 577 seats in the National Assembly and two of 348 senators in the Senate. She could call for new elections or just wait for the legislative elections of June 11 and June 18 -- when the entire National Assembly will be renewed -- and hope to secure more seats. Yet, here also, the non-proportional two-round system -- which she wants to change -- is very unlikely to turn her thin ranks into a working majority. Also, a Republican Front campaign could create a strong parliamentary opposition.
Le Pen has acknowledged that she will "necessarily" have to go beyond the Front National ranks to build a majority. In this case, she would have to compromise with pro-EU parties and probably be forced to soften her euroskeptic stance. If the opposition is combative rather than cooperative she can always call for new elections. She could also choose to stay in minority, thereby handing parliamentary power over to the opposition. This would be the fourth time this has happened in recent French political history. Based on past examples of "cohabitation," the opposition government then sets domestic policy while the President focuses on external affairs. That would make Le Pen a lame duck president from the start.
When Brexit happened the market tanked for two days then ascended to all-time highs on the realization that it'll take at least two years and that politicians like to keep their posts. While, again, the market may indeed react negatively to Sunday's results, if it's Frexit it fears, well... that's an entirely different -- and far less likely -- proposition altogether.

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