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Investors are heading into the French presidential election this weekend seemingly convinced that centrist Emmanuel Macron will triumph. What can possibly go wrong?

The euro has edged a little lower today, but at $1.0960, it is still around its strongest point since November, with gains this week pinned on Mr Macron’s well-received performance against the far right’s Marine Le Pen in the final televised debate of the campaign. He is leading in the opinion polls by a wide margin.

In the event that he does win, this may mean the market reaction is limited. David Meier, an economist at Julius Baer, writes:

We expect only a mild positive impact on European equities and limited upside for the euro, as risk discounts had been reduced substantially already following the first round, after the defeated socialist and conservative candidates urged voters to support Macron. Such limited upside could be between 3% and 5%. In case of an unexpected Le Pen win, we expect markets to rattle and European equities to drop up to – 10%, with a nosedive of the euro.

UBS thinks the European Central Bank would step in if Ms Le Pen pulled off a shock victory.

We believe the ECB’s initial focus would be on the preservation of financial stability. This would imply the provision of liquidity to the Eurozone banking sector, within the central bank’s classical and uncontroversial lender of last resort function. The aim would be to provide sufficient liquidity at a time when risk aversion might lead to problems in interbank funding markets or withdrawals of retail deposits. In doing so, the ECB could go back to the emergency tool box it used extensively during/since the global financial crisis.

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