When Emmanuel Macron topped the first round of voting in the French presidential election two weeks ago, French stocks soared to near-decade highs. On Monday, the reaction to his victory in the runoff was decidedly subdued: investors had been fully expecting it and seem wary of the difficulties he'll face reforming a divided country.
The CAC 40 index of leading French shares fell 0.9 percent to 5,383. Other indexes across Europe also dipped, while the euro, which briefly hit a six-month high above $1.10 overnight, was down 0.7 percent at $1.0924.
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In market parlance, it's a clear case of buying the rumor and selling the fact.
"With markets having rallied throughout last week in expectation of a Macron win, there was little upside left for equities and the euro," said Chris Beauchamp, chief market analyst at IG.
The clear bias in favor of Macron in the markets over the far-right candidate Le Pen rests on a number of factors, above all related to his views on Europe. Macron is a keen advocate of the European Union and the euro currency, while Le Pen has proposed taking France out of both.
Macron's victory has therefore pushed back any fear that France was on a road that could have led to the breakup of the EU and the euro itself. It's also a further dent to the populist tide that many blame for Britain's vote to leave the EU and the election of Donald Trump as U.S. president. For the third straight election in Europe, populists have fallen short — first Austria's Norbert Hofer was defeated in the country's presidential election; then far-right leader Geert Wilders did a lot worse than anticipated in Dutch elections.
Whatever Le Pen's defeat means for populism's long-term future, Macron's victory cannot disguise the fact that France remains a deeply-riven society on a number of issues and those divisions are not going to go away anytime soon. Around 11 million people voted for Le Pen, about a third of those who cast their ballots. And when looking back at the first round of voting, which saw Jean-Luc Melenchon from the far-left get almost 20 percent, nearly half the French electorate backed candidates who were against trade globalization. Add in the record number of abstentions and spoiled votes in the election, the low turnout and the defeat of traditional parties, and there's a clear sense of alienation within French society.
"Knowing all of this the new French President may well find that winning was the easy bit," said Michael Hewson, chief market analyst at CMC Markets.
How his presidency plays out and how markets move on in the months ahead could rest on June elections to the French parliament. After that, Macron will appoint a new prime minister who will then form the next French government. There's every chance that Macron will end up having to govern in a so-called "cohabitation" with representatives from parties beyond his nascent political movement, En Marche, which is being renamed as La Republique En Marche (Republic on the Move).
Cohabitation has the potential to lead to a weak presidency and frustrating Macron's reform efforts, which could undermine his popularity and stoke support for politicians with a more populist bent. Since the establishment of the Fifth Republic in France in 1958, there have been three periods of cohabitation, most recently between 1997 and 2002.
"There is a very material risk that a period of cohabitation during a Macron presidency could prevent France from implementing policies that would address its growth and fiscal challenges," said Sarah Carlson, senior vice president at credit ratings agency Moody's Investors Service.
If opinion polls are right, Macron may actually end up having a parliament largely sympathetic to his agenda at a time when the European economy — and the French one in particular — appear to be gaining momentum. Macron has proposed reforms to France's labor market, lower taxes and spending as well as a 50 billion-euro ($55 billion) investment plan.
"If all goes well, positive global and European economic tailwinds could help reap the benefits of reforms quickly, dissipating French voters' anxiety about the euro and globalization within the next five years," said Marion Amiot, senior economist at Oxford Economics.