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Macron victory already priced + China lockdown impact

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Euro Politics: Macron beats Le Pen for the second time, with market reaction limited. But the upcoming legislative election will be the next challenge for the re-elected president China Macro: Beijing lockdown fears hit markets. Balancing act continues. Sharp market reactions.

Euro Politics: Macron beats Le Pen for the second time, with market reaction limited

The final result of France’s presidential election ended up less close than anticipated by the polls, with Emmanuel Macron scoring 58.6%, comfortably ahead of Marine Le Pen’s 41.4%. Although, the margin of victory was much smaller than in 2017, with the gap between the two candidates 5 percentage points lower compared to 2017, when Macron won with a 12 percentage point gap (Macron 66% vs Le Pen 34%). Macron managed to be the country’s first leader to be re-elected since Jacques Chirac in 2002. The main policy plans of Emmanuel Macron for the next 5 years can be found here. The financial market reaction to Mr. Macron’s victory was limited. The spread between French and German government bonds had already re-compressed over recent weeks, as investors had anticipated the outcome. This was in line with the trends seen in 2017, when markets moved well ahead of the result.

But the upcoming legislative election will be the next challenge for the re-elected president

The president’s  next challenge will be to obtain a majority during the legislative elections on the 12th and 19th of June. The tighter outcome in the second round of the presidential election relative to 2017 suggests a rather difficult time for Macron to secure another comfortable majority. Even though the better score of the re-elected president gives him some momentum for the legislative election, the opposition is now mobilised more than ever to prevent Macron from reaching an absolute majority in the Parliament. Le Pen (far-right) and Mélenchon (far-left) already called their voters last night for a strong mobilisation in June and to have it serve as a ‘third round’ in this 2022 election. A more extensive note on the legislative election will follow.

China Macro: Beijing lockdown fears hit markets

As the number of Omicron cases in China’s capital Beijing (one but largest city with around 22mln inhabitants) is rising, local authorities are stepping up measures to contain the outbreak. Even though the number of infections found is still quite low (just over 20 over last weekend), the 3.5 mln inhabitants of the capital’s largest district, Chaoyang, will be tested three times this week and dozens of residential compounds have been put under lockdown. According to the local authorities, more measures are likely to contain the further spread of the virus, in line with the generally still very strict Covid-19 policies throughout the country. A comparison is easily made with Shanghai, the country’s most populated city (around 26 mln), that has been in lockdown since end-March and is only very cautiously reopening. The broadening of lockdowns is exacerbating headwinds to China’s economic growth and is adding to supply bottlenecks, with spillovers to global supply chains (see our recently published Global Monthly including our China update for more background). We have already cut our near-term growth forecasts for China, with risks still tilted to the downside. Our annual growth forecast for 2022 (5.0%) is already 0.5 pp below Beijing’s growth target of 5.5%.

Balancing act continues

If we add Beijing (around 3.5% of GDP) to the picture, amongst the largest 100 cities, a group accounting for roughly 40-45% of GDP is currently in full or partial lockdown. The bar to fundamentally ease Covid-19 policies in the near term remains high, with the leadership striking a balance between strict pandemic control and economic stability in a politically important year. This also means that reopenings will only be gradual. On the macro policy front, the PBoC recently announced a 25bp cut in bank RRRs, while cutting banks’ forex reserve ratio today by 1 pp to 8%, effective per 15 May. The PBoC refrained from further mini cuts of policy rates recently (MLF and LPR rates were kept on hold). This was in line with our view, as we anticipate that the PBoC will wait until the Covid-19 situation is more or less under control. What is more, the PBoC remains hesitant to ease monetary policy more broadly, with other major central banks on a hiking path. That said, we expect Beijing to tolerate a further modest pick-up in credit growth, while taking targeted measures to (partly) offset the impact of lockdowns.

Sharp market reactions

Meanwhile, the recent pandemic developments in Beijing and the rest of China have caused sharp market reactions, in China and beyond. Due to the impact of lockdowns and policy divergence, the Chinese yuan has lost around 3% versus the US dollar over the past week, dropping to a one-year low. While we still think that the authorities will not allow a disorderly depreciation, we have adjusted our end-2022 forecast for USDCNY to 6.60 (from 6.30).  Chinese stock markets have lost further ground, with the CSI-300 index currently at a two-year low. The developments in China have also contributed to corrections in global equity and commodity markets.