Poster by Christophe Versini for the Rassemblement National party, June 24, 2024, featuring Marine Le Pen and Jordan Balde Jordan Bardella.
Magali Cohen | AFP | Getty Images
The sell-off in French stocks and government bonds may have eased after President Emmanuel Macron called for shock parliamentary elections, but investors remain fearful ahead of Sunday’s vote, with some warning that There will be a debt crisis.
recent polling It showed the far-right National Alliance party (RN, or National Rally), led by Jordan Bardella, was likely to win the most seats in the National Assembly, followed by the left-wing coalition New Popular Front (NFP, or New Popular Front).
A centrist coalition including Macron’s own Ennahda party is expected to come in third. Sunday’s first round of voting will lead to a run-off on July 7, which could lead to a hung parliament.
This uncertainty, coupled with policy commitments from the left and right, now hangs over the market.
National Blue Chip Stocks CAC 40 The index is facing its worst month since May 2023, with major banks Societe Generale and BNP Paribas They are down nearly 19% and 11% respectively so far in June.
French bond yields (which move opposite to prices) have been relatively contained. But market watchers highlighted France’s borrowing costs relative to its neighbors, especially Germany. Since the referendum was announced, the spread between French and German 10-year bond yields has widened to more than 71 basis points, the widest in more than a decade, as investors bet that Germany is less risky.
Viraj Patel, senior strategist at Vanda Research, said in a note on Wednesday that the national rally “has been busy adjusting its policy positions on various fronts to pay tribute to Georgia Meloni. “Giorgia Meloni” was elected in Italy in 2022.
Patel added that while the initial sell-off in French stocks was due to concerns about populist policies from the National League, “the policies of the newly formed Left Alliance have caused greater excitement in the market in recent days”.
These include raising the minimum wage, freezing prices for some essential items for low-income households and changing income tax brackets.
Both sides have said they want to reverse Macron’s move last year to raise the state pension age – although Republicans have I’ve been shrinking lately And said they would offset some of the higher spending by increasing taxes on the wealthy.
“Liz Truss Style” event
Some analysts have warned that fiscal proposals from the left and right could trigger a “Liz Truss-style” market crisis.
Truss to serve as UK Prime Minister for 45 days in 2022, announced Massive tax cuts but no reduction in public spending to fund them. The fallout sparked a violent reaction in bond markets that ultimately led to central bank intervention, the reversal of nearly all policies and Truss’ eventual resignation.
Andrew Kenningham, chief European economist at Capital Economics, outlined some possible election outcomes and their market implications last week.
He said the best-case scenario was for a centrist or technocratic government to be “cobbled together”, or for the RN or NFP to significantly scale back their plans when faced with the reality of forming a government. Even so, the spread between French bond yields and German bond yields looks set to remain higher than it was before Macron called the election, he added.
“In the worst-case scenario, there will be a mature bond market and fiscal crisis,” Cunningham continued.
Cunningham said this would lead to the RN or NFP forming a government that fulfills most of its campaign promises and rejects EU fiscal rules, which could push the gap between French and German 10-year bond yields to 300 base point.
“History shows that this will force governments to change course or resign,” he said, as was the case with Italian government Truss in 2018 and French President Francois Mitterrand in 1983.
“[The European Central Bank]will be reluctant to bail out France itself unless any future government develops a credible plan to reduce the deficit. But it may also be forced to step in if yields rise sharply and get out of control, as the Bank of England did in the UK mini-budget as done later.
Debt accumulation
Another similarity with the UK is that recent drama in French politics and financial markets has been likened to the situation following the 2016 Brexit referendum, when UK assets were hit by higher risk premiums.
Christian Keller, head of economic research at Barclays, told CNBC’s “Squawk Box Europe” last week: “The comparison with the UK is interesting because in both cases you suddenly decide to force voters to make a decision, which Make the market uneasy.
He said people were not worried about France implementing its own “French Brexit” and even national rallies were no longer actively proposing leaving the eurozone or the EU.
“But there are certainly concerns about France’s fiscal development… The country’s debt-to-GDP ratio is 110% and France has no history, no record of being able to adjust its fiscal deficit,” Keller added.
Macron has made some efforts to reduce the country’s mountainous areas 3 trillion euros ($3.2 trillion) Debt piles up, including through pension age reform, but public deficit remains Increased in 2023.
“We remain skeptical about French debt,” Keller said, noting that this was because investors were more bullish on Britain ahead of the British election.
For Beat Wittmann, chairman of Porta Advisors, the recent turmoil in French assets provides investors with a good opportunity to buy. of last week.
“We see that sentiment is certainly affecting the French stock market, it has been falling, the spread relative to German Bunds has been widening – but I think that is a good entry point because at the end of the day it depends on who is elected result.
“The market has taught them a lesson beforehand, so I think that’s a good entry point.”
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