No political force in France won an absolute majority and investors brace themselves for a hung parliament. The election result does not inspire market euphoria, but there are no signs of panic either. From the investors' perspective, the most relevant factor will be the formation of the government and who will head it. Meanwhile, political uncertainty remains elevated. President Emmanuel Macron has announced that he will wait for the National Assembly to form before choosing a potential head of government. Cooperation between the political centre and the extreme left appears highly unlikely. What’s obvious, however, is the resignation of current Prime Minister Gabriel Attal. France is likely to depart from the pro-business economic policies pursued by the previous government.
Winning an absolute majority for Marine Le Pen's National Rally appeared to be the least market-friendly scenario before the early parliamentary elections in France. The country's public debt accounts for over 110% of GDP, and the budget deficit will exceed 5% in 2024. The full implementation of the far right's programme would hit the health of public finances. The threat resonated with S&P's recent downgrade of the country's rating and the European Commission's placing of France under the excessive deficit procedure.
The implementation of the New Popular Front's costly demands could have similar consequences for the public finances. Jean-Luc Melenchon, the leader of the far left, has already announced a faithful pursuit of the political agenda, marking a turn towards a decidedly more expansionary fiscal policy. From the bond market's point of view, the phrase "winding up with a bad deal" may be coming true to some extent.
The financial markets in the past week were preparing for a very different scenario. The far right was expected to be the largest force in the National Assembly but would not gain an absolute majority. The election result is fuelling uncertainty and causing consternation. The difference between the yields on 10-year French and German government bonds at the apogee of fears of a National Rally victory rose to more than 80 bp and narrowed to around 65 bp in the past few days. At the start of the week, this leading measure of credit risk widens by 3 bp. The most important index of the Paris stock exchange, the CAC40, has declined by a maximum of around 7% since the early first-round elections were called but had managed to bounce off a local bottom of 3% before yesterday's vote. On Monday shortly after the first bell, CAC40 is down 0.6% with Credit Agricole, BNP Paribas and Societe Generale shares trading over 1% lower.
Since the end of June, the euro has strengthened by around 1% against the US dollar and the franc, with EUR/USD rising above 1.08. At the start of the week, the single currency lost 0.2%. Conotoxia forecasts assume the euro will gain against the dollar in the third quarter. Our fintech's expectation of a rise in EUR/USD towards 1.10 results from looming interest rate cuts in the USA due to the weakening inflation and cooling of the jobs market.
This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.
No political force in France won an absolute majority and investors brace themselves for a hung parliament. The election result does not inspire market euphoria, but there are no signs of panic either. From the investors' perspective, the most relevant factor will be the formation of the government and who will head it. Meanwhile, political uncertainty remains elevated. President Emmanuel Macron has announced that he will wait for the National Assembly to form before choosing a potential head of government. Cooperation between the political centre and the extreme left appears highly unlikely. What’s obvious, however, is the resignation of current Prime Minister Gabriel Attal. France is likely to depart from the pro-business economic policies pursued by the previous government.
Winning an absolute majority for Marine Le Pen's National Rally appeared to be the least market-friendly scenario before the early parliamentary elections in France. The country's public debt accounts for over 110% of GDP, and the budget deficit will exceed 5% in 2024. The full implementation of the far right's programme would hit the health of public finances. The threat resonated with S&P's recent downgrade of the country's rating and the European Commission's placing of France under the excessive deficit procedure.
The implementation of the New Popular Front's costly demands could have similar consequences for the public finances. Jean-Luc Melenchon, the leader of the far left, has already announced a faithful pursuit of the political agenda, marking a turn towards a decidedly more expansionary fiscal policy. From the bond market's point of view, the phrase "winding up with a bad deal" may be coming true to some extent.
The financial markets in the past week were preparing for a very different scenario. The far right was expected to be the largest force in the National Assembly but would not gain an absolute majority. The election result is fuelling uncertainty and causing consternation. The difference between the yields on 10-year French and German government bonds at the apogee of fears of a National Rally victory rose to more than 80 bp and narrowed to around 65 bp in the past few days. At the start of the week, this leading measure of credit risk widens by 3 bp. The most important index of the Paris stock exchange, the CAC40, has declined by a maximum of around 7% since the early first-round elections were called but had managed to bounce off a local bottom of 3% before yesterday's vote. On Monday shortly after the first bell, CAC40 is down 0.6% with Credit Agricole, BNP Paribas and Societe Generale shares trading over 1% lower.
Since the end of June, the euro has strengthened by around 1% against the US dollar and the franc, with EUR/USD rising above 1.08. At the start of the week, the single currency lost 0.2%. Conotoxia forecasts assume the euro will gain against the dollar in the third quarter. Our fintech's expectation of a rise in EUR/USD towards 1.10 results from looming interest rate cuts in the USA due to the weakening inflation and cooling of the jobs market.
See also:
The euro bounces after the French vote
Riksbank pauses, rate cut looms in August
EUR/CHF bounces off lows as the SNB pushes forward with rate cuts
Low inflation in the US turns back the dollar exchange rate
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