• Out-sized market attention has been placed on the French general election this weekend on Sunday, April 23. This is due to the significant geopolitical risk posed by one of the more extreme candidates destabilizing Europe should they somehow pull off an upset victory.
  • This risk is far overblown. Populist right victories in 2016 by the UK Brexit campaign and Donald Trump created a misplaced fear bias for something similar happening in France or elsewhere in Europe. Trust in political polling is understandably low.
  • While the first round election on April 23 is somewhat of a close call, the second round runoff on May 7 will not be. The margin of error for Emmanual Macron (Independent) beating Marine Le Pen (Front National) or Jean-Luc Mélenchon (Unbowed France) in the second round is more than 20 points. That is far beyond the margin of error at this time before both the UK referendum and US presidential election. Not even close.
  • The main risk to keep an eye on at this point is both Le Pen and Mélenchon beating out the field in the first round of elections this weekend, meaning one of them would be the ultimate victor after round 2 since the threat of one of the more mainstream candidates would be removed. Stranger things have happened, but the probability of this is perhaps about 10%.
  • If the first round results indicate almost any outcome other than that posed by the point above, the euro should rally, French bonds should recover, and a global equity relief rally should ensue early next week, all else equal. It is difficult to support the opposing view with 10% odds at best per my analysis.

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