Eurozone stocks could crash up to 35 percent and the euro could tumble 10 percent in the unlikely event that far-right National Front candidate Marine Le Pen wins the French presidential election, analysts at UBS said on Tuesday. The elections on April 23 and May 7 represent the main political risk event for the euro zone this year due to the popularity of Le Pen, who is running on a platform pursuing France’s exit from the euro and the European Union, they said.
The prospect of her winning in May remains low according to opinion polls – centrist Emmanuel Macron would trounce her in the second round 62 percent to 38 percent, an Ipsos survey suggested on Tuesday. But the impact her victory would potentially have on financial markets is “too important to ignore,” said the analysts. “The assumption of the Presidential office by a politician whose main objective is France’s exit from the euro zone/EU implies significant and hard to predict redenomination and default risks with potential global spill-over effects,” they said in a report on Tuesday.
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“In addition, the systemic importance of France for the European project is such that the margin for damage limitation may well be a lot thinner than has been the case in Greece in the past or could be the case for Spain or Italy even.” Other analysts have flagged up risks connected to a Le Pen win, but UBS is one of the first to attach specific figures to that scenario. UBS analysts outlined two scenarios: one which roils global markets, and one where European Central Bank backstops contain the fallout to Europe.
The first would see the most volatility. Eurozone stocks could fall as much as 35 percent, the trade-weighted euro lose 10 percent of its value, and high-yield European bonds fall as much as 17 percent. Eurozone bond spreads over German yields could blow out to around 500 basis points in a worst-case scenario, UBS said. Outside Europe, U.S. Treasury yields could fall as much as 100 basis points, the S&P 500 shed around 10 percent, and emerging market stocks and currencies slide as much as 30 percent and 15 percent, respectively, they said.
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If the fallout is contained to Europe, the impact on emerging markets would be around half that of the global shock scenario, with EM equities and currencies facing a decline at most of around 17 percent and 8 percent, respectively. But the hurdles to Le Pen winning and then pushing through her more controversial plans are high. Assuming she fails, euro zone assets could enjoy a “substantial” relief rally, with the euro immediately jumping up to 2 percent, UBS said.
(Reporting by Jamie McGeever; Editing by Andrew Heavens)