LONDON Markets are weighing the odds as France prepares for the first round of presidential elections on Sunday, with polls indicating a tight race.
Opinion polls indicate far-right candidate Marine Le Pen and centrist Emmanuel Macron have lost steam in the build-up to Sunday's vote. They are still expected to qualify for the May 7 run-off, with Macron winning the second round, according to a Cevipof poll of 11,601 people for Le Monde newspaper. tmsnrt.rs/2jLwO20
Le Pen dropped by 2.5 percentage points to 22.5 percent of voting intentions compared with early April, and Macron fell 2 percentage points to 23 percent in the first round, Cevipof said.
But far-left eurosceptic Jean-Luc Melenchon has seen his ratings surge in polls and betting markets, which has further complicated the outlook for investors.
Melenchon was on 19 percent, the poll showed, while conservative leader Francois Fillon, recovering from a nepotism scandal, was on 19.5 percent.
With just two full trading days to go until the first round, below is a round-up of probabilities that strategists and economists at banks and asset managers assign to various outcomes, and financial market scenarios associated with them.
CANDRIAM INVESTORS GROUP (101.9 billion euros under management)
Probability of a Le Pen win: 10 percent
Market impact of a Le Pen win: "intense flights of capital", France likely to restore capital control. Eurozone equities to drop more than 20 percent, volatility (VIX) to jump. French OAT spread against Germany to rise more than 300 basis points, Euro to drop more than 10 percent. Risk of economic downturn in Europe.
Probability of a Le Pen win: 25 percent (revised up on April 10 from 20 percent previously)
Citi changed its base case, which had been a win for centre-right Francois Fillon, to a Macron win, on April 10. "We change our baseline to a Macron win (35 percent probability) - Fillon is our alternative scenario (30 percent)," the bank wrote.
"Wild card" scenario of a win by the far-left's Jean-Luc Mélenchon: 10 percent
Market impact of a Le Pen win: Euro to drop initially, "possibly sharply". Bonds to sell off on perceptions of devaluation scenarios, 10-year OAT-Bund spread to rise nearer to 200 basis points. French equities to fall 5 to 10 percent to end-June 2017.
Market impact of a Macron win: Ten-year OAT-Bund spreads to come back down to 35-40 basis points, Euro to rise
Probability of a Le Pen win: 25 percent
Market impact of a Le Pen win: European equities to fall about 15 percent
Market impact of a Macron win: Limited scope for relief rally as valuations already high
Probability of a Le Pen win: 25 percent
Market impact of a Le Pen win: French stocks to fall by double digits, French bond spreads to widen 200-300 bps, euro to fall to $0.98
Market impact of a Macron win: Eurozone equities to see a return of significant global investor flows, to the tune of at least 10 percent of current assets under management.
LA FRANCAISE ASSET MANAGEMENT:
Probability of a eurosceptic win: 25 percent (revised upwards from 20 percent on April 12)
Market impact of a eurosceptic win: France's blue-chip CAC 40 index to fall by up to 20 percent, French rates to rise 3 percent, euro to drop 10 percent. Spread between French and German bonds to rise to 200 basis points.
Euro stocks could fall 15 percent, and Italian assets would also be impacted, with a possible 20 percent drop on Milan's FTSE MIB.
MIRABAUD ASSET MANAGEMENT:
Probability of a Le Pen win: 20-25 percent
Market impact of a Le Pen win: Euro to drop 10 percent, Eurostoxx 50 and CAC 40 to drop 10 percent. Spreads between OATs and Bunds to rise 100 basis points. Corporate credit spread to rise 50 basis points in France.
Italian and Spanish indices, more exposed to the financial sector and European sales, could underperform.
Probability of a Le Pen win: 15 percent
Market impact of a Le Pen win: double-digit losses on European stocks and the euro, OAT spreads widen to about 120 basis points. Italian government bonds have more downside with spreads widening to 300 basis points.
Market impact of a Macron win: French banking stocks including BNP Paribas and Societe Generale to rally 15-20 percent.
NATIXIS ASSET MANAGEMENT (337.1 billion euros under management):
Probability of a Le Pen win: no in-house prediction.
Market impact of a Le Pen win (and eventual exit from the Euro): 15 to 20 percent drop in French equities. Euro to drop to "at least" parity with dollar, spreads with Germany to rise to 300 basis points. Households to transfer savings to accounts outside France.
"All these elements could take place before or at the moment of the second round of the presidential election," chief economist Philippe Waechter said.
Market impact of a Macron or Fillon win: Spread between 10-year French OAT and 10-year German Bund to narrow to 30 basis points. 10-year OAT, currently at 0.9 percent, could converge to 0.6-0.7 percent. Equity market "will continue to creep up", equities in peripheral markets (Spain, Portugal, especially Italy), to display the best showings.
Probability of a Le Pen win: no in-house view. "The FX market prices Ms Le Pen's chances at around 13-15 percent," strategists said in a note on April 7.
Foreign exchange volatilities likely to trade higher into the first round, weighing on the Euro. A high first-round result for Le Pen would also drive the Euro lower, Nomura's FX strategists said.
Market impact of a Le Pen win: Euro to fall 6 percent, 10-year OATs to sell off by 30 basis points. Outflows from OATs into safe havens outside of the eurozone likely. France's credit rating would be "at risk, but not an immediate downgrade".
Market impact of a Macron win: Euro to gain 1 percent, 10-year OAT yields to ease by 15 basis points.
Probability of a Le Pen win: 40 percent
Market impact of a Le Pen win: Euro stocks fall up to 35 percent, trade-weighted euro down 10 percent, 10-year U.S. Treasury yields drop 100 basis points, high-yield European bonds down 17 percent. Emerging market equities face "at most" around 17 percent and 8 percent downside respectively.
Market impact of a Macron win: Eurozone assets to enjoy "substantial" relief rally, euro to jump 2 percent
(Reporting by Helen Reid; Editing by Pritha Sarkar and Andrew Heavens)