Emmanuel Macron has won the presidency of France, and markets can heave a sigh of relief. The key question for traders is what comes next.

As Bloomberg's Cameron Crise notes, markets have cheered Macron’s victory not for who he is, but rather because of who he is not. That is a fairly slender thread on which to hang a case for a secular reversal in the euro.

Although the new president’s En Marche party should do well in the parliamentary elections next month, they seem unlikely to score an outright majority. Anyone hoping for a Thatcheresque revolution in France is likely to be disappointed.

It’s true that the European economy is doing well, and if the euro is to continue powering higher that will be the driver. Keep an eye on German bond yields; the Bobl yield is likely to threaten key resistance at -0.30% today. A break above could indeed provide a tailwind for the euro.

Ultimately, however, either the ECB or the Fed will need to change its tune to drive the euro substantially higher. While there is some hope that Mario Draghi will hint at a QE taper next month, it’s difficult to see him doing so unless there is a notable rise in core inflation.

With German and Italian elections further down the line, chasing the euro higher on a widely expected French result is probably not a good idea.

And across Wall Street, analysts see only a limited rally relief in euro and in French bonds as well as stocks. (via Bloomberg)

BNY Mellon

• “We would not be surprised were the EUR pushing toward USD 1.11 in early Asian trading,” strategist Neil Mellor said in client note
• The victory has been priced in more confidently than in round one; the market has had the reassurances offered by the remarkable accuracy of polling ahead of the first vote, and the June elections still lie in wait

Bank of America Merrill Lynch

• The outcome of the vote “should support the euro, although markets were already expecting Macron to win,” Athanasios Vamvakidis, head of G-10 currency strategy in London said in emailed comments

Credit Agricole

• “One shouldn’t expect fireworks later on. After all, there was a larger-than-90% probability for Macron making it, and polls ahead of the first round were quite accurate already,” strategist Manuel Oliveri said in emailed comments
• “A jump toward 1.1050 and slightly above is likely for euro, but a more sustained upside will depend on other factors such as further-stabilizing ECB monetary policy expectations”

Deutsche Bank

• EUR/USD will likely gap higher, looking to clean out the stop losses,before eventually consolidating lower. Equity flows are likely to increase into the euro zone,‎ but that will take time as much is already priced in.

JPMorgan Chase & Co.

• “In our view, it will be difficult for Macron to obtain a majority in the lower house, but cohabitation is likely to be avoided if Macron forms a cross-party coalition with center left and center right parties around a narrow set of reforms,” economist Raphael Brun-Aguerre said in emailed comments

ABN Amro

• “Further spread compression of French and semi-core bonds is limited,” strategists including Kim Liu said in emailed comments
• “We expect that spreads will not tighten that much as investors will look ahead at the tapering of the ECB’s QE programme and as the biggest political test for the euro zone is yet to come, which are the Italian elections”

State Street

• Markets can relax about European politics for at least a few weeks, strategists including Timothy Graf said in emailed comments

ETX Capital

• The result sends a loud signal to investors that political risks in France and across Europe are receding, and that is undoubtedly supportive of European equities and the euro, analyst Neil Wilson said in emailed comments
• Hedges in place with short expiries below 1.08 suggest we may see the euro get pushed higher
• French stocks could also benefit from the risk-on sentiment

Nordea

• Expects stronger euro, slightly higher core bond yields and narrower spreads, strategists including Holger Sandte said in a note to clients
• Assuming Macron will actually be able to put France on a reform path, French spreads should have some further tightening potential
• Such moves are more likely to take place only gradually rather than in the coming days, and only if there is further progress toward a reform-minded government able to implement a reform agenda
  Political uncertainty in France will remain elevated at least for coming weeks

Evercore ISI

• With Le Pen tail risk out of the way, the euro zone doesn’t face significant political risk again before the elections in Italy early next year, analyst Krishna Guha said
• The Macron win all but guarantees that the ECB will move to a neutral balance of risks to growth and drop its easing bias on rates‎in June; still, expects ECB to delay the big policy decision on QE to September

Here is an extended reaction from Goldman:

Centrist candidate Macron won the run-off to the 2017 Presidential election

Exit polls reported by the French media show that Emmanuel Macron, the independent candidate of the centrist political movement En Marche! (Onwards!), won the second-round run-off of the Presidential election with around 65.9% of the vote. The candidate of the far-right Eurosceptic Front National party, Marine Le Pen, won around 34.1%. Ms. Le Pen has now acknowledged her defeat against Mr. Macron, who will thus become the new French President, with a mandate of five years. 

The participation rate was widely expected to be smaller than in the first round of the election (at 75% compared with 78.7%), implying around 21mln and 10.5mln votes respectively for Mr. Macron and Ms. Le Pen.

This outcome is broadly consistent with the latest set of opinion polls, which were indicative of a tight race between Ms. Le Pen and Mr. Macron (with a lead of close to 23%).

Since polls closed at 6pm London time (at 7pm in large cities), votes from small cities (where Ms. Le Pen performed better in the first round) are thus available first. As in the first round, there is thus a difference between the projections of pollsters (that adjust for the sample of counted votes) and the raw data published by Interior Ministry. Definitive and complete official results (based on 100% of counted votes) are likely to be available by tomorrow (Monday, 8 May; 3am London time).

Markets had already reacted positively to the results of the first round of the Presidential election (on Sunday, 23 April). And since we believe a Macron presidency has been embedded in market pricing since then, we do not expect his victory in today’s run-off to have a significant impact on markets from tomorrow.

The attention now turns to the legislative elections

In order for President-elect Macron to implement the programme he set out in his election manifesto, he will need to obtain a parliamentary majority in the forthcoming legislative elections. The first and the second round of these elections will take place on 11 and 18 June 2017.

* * *

Yet while markets are unimpressed, the world's political leaders are all basking in the rays of hope that Macron's win provides...

• Emmanuel Macron winning French presidential election is a “victory for a unified Europe and for the German-French friendship”, German government spokesman Steffen Seibert says in Tweet.
• France is and stays “in the heart of Europe”, German Foreign Minister Sigmar Gabriel says in Tweet
• U.K.’s Prime Minister Theresa May “warmly congratulates” Macron, according to spokesperson
• EU’s Jean-Claude Juncker says he is happy that French chose a European future in Tweet
• EU’s Donald Tusk congratulates French people for “choosing Liberty, Equality and Fraternity over tyranny or fake news”
• Current French President Francois Hollande says called Macron to “congratulate him warmly on his election”
• A victory “for European cooperation”, Swedish Prime Minister Stefan Lofven says in Tweet
• Spanish Prime Minister Mariano Rajoy calls for French- Spanish cooperation in Tweet
• Macron’s win means “hope” for Europe, Italian Prime Minister Paolo Gentiloni says in Tweet
• French have chosen “a future that doesn’t involve protectionism or closed borders”, Finnish Finance Minister Petteri Orpo says in tweet.
• President Trump tweeted: Congratulations to Emmanuel Macron on his big win today as the next President of France. I look very much forward to working with him!"

It is far from over though

“Macron’s biggest challenge now is to win the battle for parliament,” Dominique Reynie, politics professor at Sciences Po, said in an interview. “In the French system, if he doesn’t have a majority he’d have only limited power, he’d become a constitutional monarch. If he has his own majority, he’d have all the powers which the Fifth Republic grants the president.”

In her concession speech, Le Pen claimed the mantle of leader of the opposition, saying that the legislative elections were looming and “I’ll be at the head of this fight.”