Traders work on April 24, 2017 at the stock exchange in Frankfurt am Main, Germany.DANIEL ROLAND/AFP / Getty Images
While French voters didn't shock markets by sending both presidential candidates from the far left and far right to the decisive second round in two weeks, investors did not get their dream lineup: A contest between Emmanuel Macron and Francois Fillon, the two most pro-market candidates.
Instead, the runoff between the National Front's Marine Le Pen and Mr. Macron -- the individual possibility to which the market assigned the highest single probability -- involves a clear battle between a commitment to shake the economic system and one to create change within the existing structure. And this first-round vote doesn't signal, at least yet, the end of the anti-establishment phenomenon.
Although counterfactuals are inherently tricky, let's start the market analysis by discussing what will not happen.
Risk assets and the spreads on French and peripheral bonds will avoid the volatility selloff that they surely would have experienced had Ms. Le Pen and Jean-Luc Melenchon, a far-left candidate, made it to the second round. With that, there will be significantly less risk of destabilizing capital flows out of the French banking system. At the same time, markets will not experience the extreme joy that would have resulted from the opposite outcome, a Fillon–Macron second round.
The initial market reaction to the actual outcome of the very competitive first round should be positive for risk assets and the euro, though not necessarily ebullient. The extent of the rally depends on what the final numbers say about the strength of Ms. Le Pen's showing, especially now that both Mr. Fillon and Benoit Hamon, the Socialist Party candidate who was badly defeated, have rushed to throw their support behind Mr. Macron for the May 7 runoff.
Looking ahead, and based on the widespread conventional view that a majority of the French electorate will again seek to vote for any alternative to the National Front, most market participants will likely assume that, when push comes to shove, Mr. Macron will be elected president -- even though he lacks a political party and now faces the prospect of being pressed much harder on policy positions and past actions.
If this scenario were to be realized, markets would do more than avoid an upfront shock. They also would take France off the list of possible sources of systemic shock.
The immediate sighs of relief would be experienced well beyond markets. Two central banks -- the European Central Bank and the Swiss National Bank -- would be able to shelve plans to stabilize markets through exceptional measures in order to avoid wild moves in the currencies, at least for now. The Greek government would feel slightly more confident about the possibility of avoiding a debt cliff in the summer, though it still needs to resolve differences between the International Monetary Fund and European partners. And Germany would be less concerned about being forced further into anchoring a euro zone subject to growing forces of fragmentation.
With the relief, some investors may be tempted to go further and interpret the result as an indication that the wave of anti-establishment sentiment that delivered Brexit and the Donald Trump presidency has dissipated, allowing markets to set aside considerations of political and geopolitical risk in a more significant manner. But that would be premature, including when it comes to France, for two related reasons.
Not all the uncertainty in France has been lifted. Even if Mr. Macron prevails in the second round, the country's political system still has to deal with the fallout from a marginalization of mainstream parties in the presidential race that is unlikely to extend to the legislative elections that are scheduled for June. Some form of "cohabitation" -- a government made up of a president of one party and a prime minister from another -- will have to emerge, which is far from a straightforward proposition.
Although an immediate extreme outcome has been avoided, there is no denying that this is another example of an event deemed improbable not so long ago becoming reality. Remember, few initially took seriously Mr. Macron's notion of getting to the second round as he was powered by a movement rather than a party.
Questions remain, though markets understandably will be relieved by the outcome of this first round. A potential bullet has been avoided and, absent an unanticipated shock, the markets already expect the second one to be avoided in the next round of voting. But it is way too early to declare an end to the anti-establishment phenomenon that has turned improbables, if not unthinkables, into realities.
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Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President's Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include "The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse."