Ahead of Sunday's first round of the French election, we have previously provided several perspectives on the political and economic outcomes, including a permutation matrix of all six possible outcomes in terms of "high" vs "low market risk" (from BofA), why the market may be too complacent about a Le Pen - Melenchon result (candidate approval variance is within the polling error), and that European stocks have completely failed to price in any adverse outcome (as DB observed yesterday).

So with markets now closed, and all bets off, if only for the next two days until the results emerge, here is a complete guide to the first round of the first elections, compiled based on research reports by Deutsche Bank and Citigroup.

Guide to the French elections first round, from Deutsche Bank and Citi

Summary:

• The first round of the French Presidential elections will be held on Sunday 23rd April.
• Most polling stations will close at 7pm local time but some will remain open until 8pm local time. The first exit polls should be published at 8pm but may have to be taken cautiously. By midnight local time we could expect to have a clear picture of who would make it to the second round.
• Since publication of our initial comprehensive piece on the French elections, the polls for the four major candidates have narrowed considerably and Mélenchon has replaced Hamon on the left wing. The narrowing of the polls and the historical error in actual voting relative to polls makes any of the six outcomes involving the four major candidates possible.
• In order of decreasing likelihood the potential outcomes are (1) Macron vs. Le Pen (2) Le Pen vs. Fillon (3) Macron vs. Mélenchon (4) Le Pen vs. Mélenchon (5) Macron vs. Fillon and (6) Mélenchon vs. Fillon.
• Based on current polls, in our baseline scenario of Macron vs. Le Pen in the second, Macron is expected to win comfortably. Le Pen would have to win the first round with a gap of 5pp or more and/or the participation rate in the second round to fall below 60% for her chances to improve significantly.
• We assess the expect market impact on bond markets based on expected yield and spread levels for a presidential win for the four candidates and indicative probabilities of a win for the candidates in the second round conditional on the outcome of the first round.
• Macron is favoured to win against all candidates if he makes it to the second round. Based on current polls market concerns about French elections should recede considerably in any outcome with Macron in the second round.
• OAT-Bund spreads have the greatest room to widen in case of a Mélenchon vs. Le Pen outcome, while it has the most room to tighten in case of a Macron vs. Fillon outcome. However, in the latter scenario the tightening in OAT-Bund spreads should be more than offset by the rise in Bund yields leaving OAT yields broadly unchanged.

Timeline of Sunday 23rd April:

On Sunday 23 April, most polling stations will close at 7pm local time but some will remain open until 8pm local time. The first exit polls should be published at 8pm but may have to be taken cautiously. Press reports suggest that pollsters are worried about their ability to provide accurate exit polls at 8pm . Throughout the evening, polls are counted. By midnight local time we could expect to have a clear picture of who would make it to the second round.

• At 19:00 BST / 14:00 EDT preliminary results are released, which is perceived as a usually good indicator of the final results. This will give markets a good hour to digest before Asia markets open at 05:00 Sydney / 20:00 BST / 15:00 EDT. In 2012, 80% of the vote was counted by roughly 22:00 BST. Note that polling stations in rural areas close by 17:00 BST, urban polling stations by 18:00-19:00 BST.
• However, watch out for leaks. In 2012, journalists and pollsters circumvented the law by employing code names for each candidate, leaking the results of the exit polls to the public off. These reports were then quickly picked up and distributed by foreign new outlets which are not subject to French laws. On the night of April 23 look to the airwaves for news; perhaps #RadioLondres will be making another dramatic call to La Resistance.

The candidates – A four horse race:

Of the 11 total candidates, four leading the race. Citi Research’s latest probabilities of each candidate becoming President are: Macron (35%), Fillon (30%), Le Pen (25%), Melenchon (10%). What is clear is that the first round will be too close to definitively call – it’s a four horse race.

• Marine Le Pen: The right-wing candidate is the main risk for EUR. She has repeated a campaign promise to propose a referendum on France’s membership in the Eurozone and EU within six months. She is expected to go through the first round with ease, but not likely to prevail in the second round, ultimately.
• Francois Fillon: Conservative candidate and former PM was formerly the front-runner. However his popularity has been undermined by controversies, particularly allegations he paid his wife with taxpayer money for a job she did not perform.
• Emmanuel Macron: The independent centrist and former economy minister is Citi’s base case winner. His new party En Marche has continued to gain momentum.
• Jean-Luc Melenchon: The wildcard candidate has gained impressive momentum in the last month or so. The hard left wing candidate proposes a top income tax charge of 90% and to renegotiate the terms of France’s EU membership.

The first round: A close four way race

The first round polls have narrowed considerably The gap between the 4 major candidates has narrowed considerably over the past few weeks. Given the relatively narrow range between the various candidates and historical polling error, any of the six outcomes taking into consideration the four major candidates is possible.

Based on the final polls, Le Pen and Macron are still the favourites expected to make it past the first round and this remains the most likely outcome. As the current polls have Mélenchon and Fillon lagging, the scenarios which see them making it past the first round would probably be based on them doing better at the expense of the two front-runners.

• Mélenchon’s progress has been mainly at the expense of Hamon. To make it past the first round he would have to capture voters further away on the political spectrum. We would expect his gains to be marginally more at the expense of Le Pen rather than Macron This implies that in the second round Mélenchon vs. Macron is more likely than Mélenchon vs. Le Pen.
• In the case of Fillon, we would expect his gains to be more at the expense of Macron rather than Le Pen. Fillon’s experience and party structure could make centre-right voters tempted by a Macron vote switch back to Fillon at the last minute. This implies that in the second round Fillon vs. Le Pen is more likely than Fillon vs. Macron
• The probability of both Melenchon and Fillon making it past the first round remains low but cannot be ruled out entirely.

All six outcomes are possible

The six outcomes ordered by decreasing likelihood (i.e., most likely at the top of the list) are listed below. We also highlight the indicative probability of the first candidate wining the second round in each of these outcomes

• Macron vs. Le Pen: Based on the current stated intentions and certainty to vote expressed in polls and barring a significant upside surprise for Le Pen, we would expect reasonably high chances (~80%) of Macron wining the elections. The chance for Le Pen to win the second round would increase if she wins the first round with a gap clearly larger than 5pp. A low participation rate in the second round could also increase Le Pen’s chances (<60%).
• Fillon vs. Le Pen: Based on the current polls and historical polling errors, we would expect Fillon’s chances to win the second round to be around 70%. Le Pen’s chances to win are likely to increase if the participation rate in the second round is lower than 55%.
• Macron vs. Mélenchon: We would assign a relatively high probability (~80%) for Macron to win the second round. Mélenchon’s chances would increase if he is able to gather even more support from the supporters of the socialist party candidate Hamon in the second round.
• Mélenchon vs. Le Pen: Conditional on Mélenchon making it to the second round vs. Le Pen, we would assign a higher probability (~60%) of Mélenchon rather than Le Pen winning the second round. According to polls and vote transfers between rounds, Mélenchon is more likely to appeal to the traditional centre-left and centre voters compared to Le Pen who would appeal mostly to the most conservative Republican party supporters.
• Macron vs. Fillon: Based on polls, we would still assign a reasonable high probability to Macron winning the second round (~75%).
• Mélenchon vs. Fillon: In this scenario we expect the second round to be reasonably close as the two front runners in the first round would have lost. Given the more strong upward momentum for Mélenchon and recent polls, we would assign a slightly higher chance (~55%) to him wining the second round.

Three key factors you should watch

Momentum is a key ingredient in this contest: Looking at recent polling, Le Pen appears to be losing some, down 1.1% point on average compared to previous surveys. Macron’s first round voting intentions have eroded by 0.2% point. Fillon and Mélenchon, by contrast have gained 1.0% point and 1.2% point respectively.

Turnout is crucial. The five-poll average suggests that 69% of voters are sure to cast a ballot, with at least an extra 10% who think that they will but cannot say for certain. However there are conflicting interpretations on how this might impact the chances of each candidate. There’s two sides to the argument:

• Higher turnout arguably tends to benefit more status quo candidates, such as Macron, who the polled suggest their less certain to show up for.
• But in the case that the turnout were to be lower-than-expected, it would likely favor Macron and Fillon whose sympathisers tend to be from voting groups (demographic wise) that are more likely to cast a ballot. If turnout is higher, then anti-establishment extremes are likely to do a little better than suggested in polls.
• CitiFX Strategist Josh O’Byrne helpfully points out, “Turnout stats by department should also be released before initial results. Figure 1 shows the top and bottom Departments for Le Pen in 2012, based on the deviation from the national average. Exceptionally high turnouts in populous Departments such as Pas-de-Calais, Gard, Paris or Hauts-de-Seine, could give an early indication of how the evening may evolve.”
• The last issue we have touched upon briefly - voting intentions. The ‘certainty of choice’ as indicated in polls suggest that Le Pen supporters are especially strong.Le Pen’s base is the strongest, with around 84% according to Ifop-Fiducial's daily tracker, just ahead of Fillon around 82%, compared to the overall 72% average. Macron is slightly behind on 69%, with Mélenchon on 67% and Hamon on 63%. The amount of choice on the Left explains these lower ratings, but also increases tail risks for Sunday.

Impact on bond markets

In assessing the potential market impact of the result of the first round of the French election, we use the scenario analysis previously published for yield levels in case of victory in overall presidential election for the four major candidates.

Our indicative yield and spread levels in the various outcomes of the first round are conditional on the levels we see under the presidency of the four candidates and the conditional probability of the final outcome following the first round. Investors might have expectations of different levels and probabilities but our analysis provides a reasonable guide and framework.

In previous analysis we have estimated that the OAT-Bund spread could be ~200bp in a Le Pen win, 150bp in a Mélenchon win and 45bp in a Macron/Fillon win. Previously we had not distinguished between a Macron and Fillon presidency but we now decide to distinguish between the two even though the difference is fairly minor. In our view, Fillon’s pro-reform agenda and the backing of an established party in the parliament could see the OAT-Bund spread tighten back to the level seen in Q2-14 level of ~40bp. However, in case of a Macron win the risk of a failure to deliver could increase and the OAT-Bund spread might not tighten below the current level of Belgium-Bund spread (~50bp).

The table below summarizes the 10Y bund yield, OAT-Bund spread and BTP-Bund spread level in these scenarios for reference.

For the six outcomes discussed in the previous sections and using indicative probabilities based on polls on the second round outcome conditional on the outcome of the first round we show indicative levels for the OAT-Bund spread after the first round of elections.

Using the same framework and our previously published scenario for 10Y Bund yields and BTP-Bund spreads we arrive at the following levels for the indicative level of 10Y yields in Germany, Italy & France after the first round of the French election. It should be noted that in particular our framework was initially published in early March when the level of 10Y bunds were higher at around 0.35% compared to current levels of 0.25%.

Electoral dashboard

We have been publishing an election dashboard that tracks the polls’ evolution. For details of methodology see here.

Mélenchon’s surge also happened in 2012: In figure 6, we reproduce polls for Mélenchon in 2012 in the last month before the election. Mid-March2012, he was polling around 11% and then surged above 15% at times. Ultimately he only gathered 11% of the votes. The similarity with the 2017 polls and momentum is striking. If Mélenchon wants to have a chance to make it to the second round, he cannot rely on taking votes from Socialist Hamon anymore. He will have to adopt a different strategy and either aim to capture Le Pen’s voters or Macron’s voters or convince abstentionists to support him. Figure 3 also shows that many of Mélenchon’s potential voters are not certain of their choice.

Second round - In the two graphs below (figures 7 and 8), we report the polls’ evolution of support for mainstream candidates Fillon’s and Macron’s leads over Le Pen in the second round of the Presidential elections, which have been relatively stable in recent weeks.

Second round vote transfer – Figures 9 and 10 show how votes could transfer between the first round and the second round of the Presidential elections. Here we adjust them to represent the share of the electorate of each candidate that would likely switch to Le Pen, abstain or choose Fillon/Macron.

We then show how these vote transfers among first-round voters could add up in the second round (Figure 11 and 12).

Brexit and US elections polling errors applied to French polls: In the case of the US elections and particularly Brexit, polls underestimated the risks of a surprise. Figure 13 and 14 trace the history of polls in the six months prior to the vote for Brexit, and from the day Trump and Clinton were the official nominees in the US. The solid lines represent actual polling data. The dotted lines adjust for the margin of error. We apply the Brexit and US election margins of error to the Le Pen-Fillon gap and the Le Pen-Macron gap in the French second-round polls.

Pollsters careful about not underestimating National Front support: In France, pollsters are careful in measuring National Front support. Figure 15 traces history of polling estimation error for National front since 2002. Also, the mobilization of the French electorate against the National Front should not be ignored. Recently in the 2015 regional elections – National Front candidates were defeated by wide margins against centreright candidates in two regions contrary to opinion poll expectations (Figure 16).

* * *

Possible scenarios & implications for EUR

• There are six possible paths for two of the main four candidates to advance to the second round. Consequently unlike previous political risk events (eg Brexit, Trump), the outcome is anything but binary. This makes it tricky to determine how EUR will react.
• There are two key negative scenarios that will be at the forefront of investors' minds: 1) Le Pen vs. Mélenchon, and 2) Fillon vs. Mélenchon. We’re most worried about the former, which has been described by some as a 'nightmare' scenario and roughly 7% priced in in the options market. If these are the final candidates for May 7, this would a hard choice between two anti-globalization, anti-EU and pro-Russia candidates. EUR is likely to react accordingly, and understandably negatively.
• The most positive outcome for EUR on the other hand this Sunday would be Le Pen coming in third place, entirely discounting the chance of her advancing to the second round and the possibility of victory. A Macron vs Fillon scenario would be ideal in such a case, as both candidates are seen as moderates. Alternatively a Le Pen vs Macron scenario for the second round would also be a positive.
• Naturally, an ultimate Le Pen victory would be the most negative for markets given her anti-EU and “Frexit” stance. As such, one thing to watch in the first round election results is her margin of victory, if she scores the highest, relative to current polling. If she obtains say, 30% of the vote or more, then EUR is likely to sell off rather sharply (she currently polls 23-24% on average).

For those who missed, here is a scenario analysis from BofA laying out the potential market impact of the 6 possible outcomes from the first round:

What happens next? It’s not over yet

If no candidate gets 50% in the first round vote (as is expected), then the top two candidates go through to the next round a week later and the one who gets the most votes wins. Polling restarts on Monday and there is a TV debate for the final scheduled for Wednesday May 3. The second round vote will be held on May 7.

Also note that legislative elections are held in June. If the President fails to secure a majority in the Assemblée Nationale with their party, the country will fall into a period of “cohabitation” – which means the president will have diminished powers. Voters will elect into the lower chamber of parliament representatives from 577 constituencies. 

As Citi Research point out, even if Macron wins, it is unlikely that his party will have an outright majority. The most likely scenario here is a governing coalition. Le Pen’s FN, which currently has only two MPs, is extremely unlikely to get anywhere near the 289 Le Pen would need for a majority in the assembly. This is a problem Mélenchon would also face. More radical proposals, such as an EU/Eurozone referendum, will be harder to implement subsequently.

Timeline:

• April 21 – [from midnight] Poll blackout
• April 23 – First round of French presidential elections. At 19:00 BST / 14:00 EDT, media is authorized to report preliminary results (Not exit polls, but numbers based on processed ballots – historically an accurate indicator of the final result)
• April 26 – Official announcement of first-round results (latest date)
• May 1 – Local holiday in France
• May 3 – TV debate between the two remaining candidates
• May 5 – [from midnight] Poll blackout
• May 7 – Second round of French presidential elections. Last polls close at 19:00 BST / 14:00 EDT, with an exit poll result announced immediately.
• May 11 – Official proclamation of the new President.
• May 14 – [from midnight] End of Francois Hollande’s mandate
• June 11 – First round of legislative elections
• June 18 – Second round of legislative elections.