What Markets Should Conclude From France's Election

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 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 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.