Wall Street can start moving on

The first round of the French election is over, and investors can start moving on.

With 97% of the results reported, centrist Emmanuel Macron was ahead with 23.9% of the vote, followed by Marine Le Pen, the far-right candidate, with 21.4%.

Macron is clearly investors’ favourite, given the reaction in global markets after the election. Stocks on major indexes nearly everywhere are surging in a decisive risk-on trade, while traditional safe havens like gold and Treasurys are selling off.

“The market can afford to start looking beyond France,” said Marc de-Muizon and Mark Wall, economists at Deutsche Bank, in a note on Monday.

“Overall, given how close the first-round vote looks to the pre-election opinion polls and how Le Pen has consistently lost to Macron on second-round polls throughout the campaign, the market ought to feel relatively comfortable with the residual risk into the second round on 7 May.”

Le Pen was considered the more unfriendly for markets among the frontrunners as she campaigned for France to leave the European Union, return to the franc, tax foreign workers, and constrict immigration.

The polls nailed this result, amid concerns that followed the the British referendum last June and the US election in November. Macron was in the lead with 23% of the vote, while Le Pen was a hair below in second place, according to an average of various opinion polls calculated by Deutsche Bank.

For that reason, markets are confident in polls that show Macron, a globalist who supports France’s membership in the European Union, obtaining 60% of the vote in the second round. And so, the rally on Monday is maybe not just a sigh of relief at Sunday’s outcome, but an expectation for the next round of voting.

But of course, the consensus could be wrong. A scandal could erupt in the next two weeks, or enough people may end up voting for the candidate they didn’t pick when they were polled.

“In the medium run, to improve France’s economic outlook, it is important that the elected President obtains a majority in the lower house,” Deutsche Bank wrote on what lies ahead.

“For the first time in French political history, none of the main historical parties in France will be in the second round of the presidential elections. The disappointing performance of the center-left Socialist party as well as the third place finish of the center-right Les R├ępublicains party means that the political landscape is likely to be reshuffled in the coming weeks.”

The UK election in June, Germany in September, and Italy next year could shake up the landscape outside Europe.

“In our opinion, the one with the highest risk of a market-negative populist shock is Italy, but with the Italian election at the back end of the sequence and potentially more than six months away, the market might not rotate to focus on this just yet,” Deutsche Bank wrote.

In the US, investors face the busiest week of S&P 500 earnings in several years. The first-quarter reporting season is going well so far: including the sharply improved energy sector, earnings are up more than 11% year-on-year, according to Oppenheimer.

And this is what matters more to US investors right now, not worries or enthusiasm about France. Even if Le Pen wins the second round, she must still secure a majority in parliament so that her agenda stands a chance, and go through the Frexit referendum process.

“If there is a level of anxiety among investors about that, it’s maybe misguided to the extent that they don’t really understand how much of a long shot all of that is,” said Randy Frederick, the vice president of trading & derivatives at the Schwab Center for Financial Research, before the first round.

“I don’t think they understand the parliamentary system and how it’s different from how the US system is set up.”

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