People hold French flags as they gather at the Place de la Republique after partial results in the second round of the early French parliamentary elections, in Paris, France, July 7, 2024. REUTERS/Abdul Saboor
THE likelihood of a fragile French government after a shock victory for the left has analysts rushing to gauge the impact on markets there and beyond.
The closely watched spread between French and German bonds is expected to widen over coming weeks, while increased risks surrounding the country’s debt profile could keep the euro under pressure.
Still, some strategists suggested after a period of initial weakness markets could come to like a hung parliament scenario.
Euro slips as left-wing’s surprise surge in France sows fiscal doubts
Here’s what market participants are saying:
Krishna Guha, strategist at Evercore ISI: “The show of support for the left/far-left and calls by far-left leader Melenchon to enact the full hard-left New Popular Front (NFP) agenda will unsettle some investors.
“But we view the outcome as broadly market-friendly, with National Rally (RN)-related risks disappearing for now and the left/far-left NFP set to fall far short of a majority with essentially no prospect of being able to enact its agreed alliance agenda.” Emmanuel Cau, head of European Equity Strategy at Barclays: “Election results bring more questions than answers.
“A hung parliament was largely expected, but markets are likely to worry about lingering uncertainty and political deadlock, as well as looser fiscal policy given the higher score for the left. But Macron’s party has done better than expected by the polls, which means he could form a wide coalition, which would likely be seen positively by markets. So games are still wide open.”
James Rossiter, head of Global Macro Strategy at TD Securities: “A left-led hung parliament is set to drive the OAT vs Bund spread widening above 80 basis points (bps) on open.
“That said, ultimately a limbo state of government could see the spread return to linger around the 70 bps level. Euro/US dollar has opened around 30 percentage in points lower from last Friday’s close to 1.0810, but risks of a rising debt profile are unlikely to do euro any favours in the months ahead.”
Vincent Juvyns, global market strategist at JPMorgan Asset Management: “It’s hard to call if the stock market will rise or fall but in the next couple of weeks, I think the spread with Germany will likely widen.
“The European Commission and rating agencies are expecting 20bil to 30bil of cuts but the government will actually have to deal with a party which wants to increase spending by 120bil. This could create tension across markets in the coming weeks. Markets may demand a higher spread as long as the new government hasn’t clarified its fiscal position.”
Joachim Klement, strategist at Liberum: ‘’The exit polls point to a shock victory of the left-green alliance. However, this alliance will not get the absolute majority and will likely have to form a pact or even a formal coalition with Macron’s Renaissance bloc to form a government.
“On the one hand, this is good for France and the European Union (EU) because it allows for Macron to govern from the centre and make fewer compromises than with a RN government.
“On the other hand, we should not forget that the leader of the left-green alliance, Jean-Luc Melenchon, is just as eurosceptic if not more so than Marine Le Pen. This outcome should be marginally positive for the euro and French stocks.
“However, we don’t expect too much upside since the French government will be split between two blocs that aren’t always looking eye to eye with each other.”
Stephane Deo, a senior portfolio manager at Eleva Capital SAS: “Virtually all the pollsters gave zero probability to this outcome. Nobody expected the NFP to be so high, but with a third of the seats it will be extremely hard if not impossible for most of their proposals to go through. So even if markets are initially concerned by these results, I think they could like the hung parliament scenario.”
Diego Fernandez, chief investment officer at A&G Banco: “As the market had already discounted over the last week, the risk of Le Pen’s majority disappears. Now a period of uncertainty opens, but the difficulties for the left to appoint a prime minister despite the electoral victory mean that populist measures that do not help will be discarded. Good for Europe.”
Charles-Henry Monchau, chief investment officer at Banque SYZ: “We note that within NFP, the socialist party PS and the Greens have a strong score relative to radical left LFI. As such, it is unlikely that LFI will be able to claim the Prime Minister seat. “All in all, the result is rather negative for markets as the radical left and left NFP party program is somewhat of a flash back into the old French socialist program including retirement age at 60-year old, increase of the minimum salary, increase of taxes on the wealthiest 10% and decrease the taxes of the other 90%. this would be both inflationary and increase debt load and budget deficit”
Frederique Carrier, head of investment strategy at RBC Wealth Management: “The fact that the NFP would hold the most seats has not been telegraphed in markets, and markets might worry a little bit because although they don’t have a majority, their agenda is definitely to spend more and it’s not business friendly.
“We might still have a hung parliament, and that means that the fiscal situation is not going to improve.
“The spread of long-term French bonds versus German bunds had narrowed a little bit last week, but we’re likely to go back to a slightly wider spread while we try to figure out how chaotic this new government will be. “The risk premium in France might rise a bit more. In stocks, the ones that interest us are global leaders and a chaotic France does not really impact them.
“If people throw in the towel and overreact, we would treat it as an opportunity to increase exposure. From an equity point of view, a lot of negative news has been priced in.”
Holger Schmieding, chief economist at Berenberg: “It could have been worse. Nervous is probably the best word to describe how markets may react on Monday. I do not see this as a reason for a major sell-off. After all, Macron’s centrists also did less badly than expected.”
James Athey, a portfolio manager at Marlborough Investment Management: “The market unwound a fair amount of risk premium and obviously was getting comfortable around the idea that there wouldn’t be a majority for the far right.
“But the left most certainly are a more concerning policy prescription from a fiscal policy standpoint.
“So the fact that they’ve performed so strongly should well be seen as a negative from where we were Friday at the close.
“But I say that with not much confidence because largely the market has a somewhat rose-tinted view of most of these sorts of scenarios, it looks for the positives, and it may well be that it latches on to the idea that nothing bad can happen because it’s such a fragmented result.” —Bloomberg
