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Current elections and their impact on markets

The upcoming French election could a create a headache for the European Union and its markets – but the US mid-terms may be positive for those in the US.

| 7 min read

Hungary’s ruling Fidesz party has romped home to another election victory. It took two thirds of the seats in the Parliament, with 53% of the popular vote, against a new coalition of parties out to provide a concerted and stronger opposition.

The opposition campaigned under the banner “United for Hungary” and wanted the country to follow a more conventional pro-EU policy. Prime Minister Viktor Orban held his vote by promising to keep Hungary out of the Ukraine/Russian war and diluting his normal support for Russia. He was harried from the right by a new party, the Homeland Movement, which managed to take 6% of the vote and 7 seats, on a ticket of wanting a more nationalist approach.

The EU will be disappointed it still has to deal with a difficult member who takes different views to the general ones on human rights, migration, the role of the courts and on the Russian invasion of Ukraine. Serbia too held elections where the government was returned on a pro-Russian ticket. Neither result will alter the main thrust of EU policies.

The rise of Le Pen

This weekend, France goes to the polls for its first-round ballot on who should be President. Once again it looks likely that France’s two great parties of the last century, the centre-right Republicans and the centre-left socialists, will find their candidates struggling way behind the two front runners.

President Emmanuel Macron, with his relatively new party En Marche, should come first with around 26%-28% of the vote if the polls are accurate, whilst Marine Le Pen of National Rally will come in second with around 20%-24%. These two will then run off in the second round two weeks later to reach a majority winner for the job. It is likely Jean-Luc Melenchon, the left-wing politician of France Insoumise will come third, and Éric Zemmour of the new party Reconquete may come fourth.

Le Pen has done a great deal to change her party’s image.

Mr Melenchon’s vote of around 17% will mainly pass to Mr Macron and Mr Zemmour’s vote of around 9% will mainly go to Ms Le Pen. Valérie Pecresse of the Republicans may be in fifth with just under 9% or could edge ahead of Mr Zemmour. Le Pen has done a great deal to change her party’s image and to switch from migration to cost-of-living matters in the hope she can gain much of the Republicans vote in the second round. Polls for the final vote suggest Macron will still win but by a much-reduced margin compared to last time. Polls put him on 52%-55% and Le Pen on 45%-48%.

We have assumed, as have markets, that Mr Macron’s late entry into the election after using the Presidency to grab the headlines would enable him to stay in office. It now appears it will be closer than he would like – and he himself is drawing attention to the narrowing of the polls to try and mobilise reluctant voters for him in the expectation that they will still be worried about his rival.

Mr Macron is unpopular thanks to inflation and to living standards issues. A re-elected Macron will continue with his ambitions to lead the EU in foreign affairs and to wrestle with low growth and a complex state sector at home. He has not done much to relieve the cost-of-living squeeze and avoided campaigning and domestic issues until making a late entry into the election.

The implications should Le Pen win

Should Ms Le Pen pull off a late-run victory French policy will be more nationalistic. She wants to use subsidies and state power to drive change in the French economy and will take a more sceptical approach to EU initiatives. She has dropped her previous hostility to the Euro in pursuit of more pro-EU voters. She may be a kind of French Trump populist. Her website still has some material in favour of less immigration. She stands up for the sovereignty of member states against the powers of the EU and has offered support to Hungary and Poland in their tiffs with the European Court of Justice.

Her most attractive policy to many voters is a large cut in VAT on energy from 20% to 5.5%. Her key words are sovereignty and liberty, security and prosperity. She spent six months touring France speaking about cost-of-living issues, appearing in local media and drawing a contrast with an absent President. Markets would be worried at first were she to win, but the programme Ms Le Pen has described so far would not make fundamental changes whilst easing the cost-of-living problem a bit by tax cuts and subsidies. The EU would have difficulties with a French leader less committed to the project of ever-closer union.

Biden to become a lame duck

We are also in the long run up to the US mid-term elections in November. President Biden’s popularity has slumped to one of the lowest ever for a first-term President, to around 42%. Past Presidents with ratings below 50% have usually seen losses of House seats at the mid-terms. The Democrats look to be on target to surrender control of the House, where the loss of five seats out of 435 would see them lose their current slender majority.

Only a third of Senate seats are up for election, with as many Republican swing seats at risk as Democrat.

The generic polls for these races show the Republicans with a narrow lead over the Democrats that is sufficient to take control. Only a third of Senate seats are up for election, with as many Republican swing seats at risk as Democrat. Just as the Senate is currently on a knife edge with the majority resting on the Vice President’s casting vote, so the Senate election is likely to be close. There also remains a chance of the Democrats holding on.

We remain of the view that the Democrats are likely to lose seats given the inflation, rising mortgage rates and the President’s unpopularity. This will mean the end to any idea of a big programme of higher taxes or a further large increase in state borrowing, which markets may find reassuring.

We will then enter the two-year run up to the next Presidential election where the Democrats as well as the Republicans may be looking to change candidate. The Democrats position could improve before the mid-term election, which will take a revival in the President’s popularity and better news on inflation.

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Current elections and their impact on markets

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