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French Markets Slide as Nation Plunged Into Political Turmoil

In Business
June 10, 2024

(Bloomberg) — French markets tumbled as President Emmanuel Macron’s shock decision to call an election gave investors yet another reason to ditch the nation’s securities.

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Stocks slumped, with banks leading losses, as uncertainty over who will govern France added to existing angst about the country’s fiscal woes. Yields on French bonds soared to the highest since November and the euro tumbled to a one-month low. Meanwhile the pan-European Stoxx 600 stock index slipped as much as 0.9%.

Markets have been on edge for months over France’s growing debt load, as attempts to rein in spending and borrowing run into roadblocks, prompting a credit downgrade by S&P Global Ratings last month. But the scope of Monday’s market tailspin suggests financial assets could feel more heat in the coming weeks ahead of the election, with gauges of volatility surging.

“Investors don’t share Macron’s risk appetite,” said Stefan Koopman, senior macro strategist at Rabobank. “His courage is undeniable, we’d give him that, but it seems like doubling down on a bet after a poor performance.”

While Macron’s position isn’t immediately at stake, the poll is a gamble that could bring far-right leader Marine le Pen closer to the top office even before the 2027 presidential election. The outcome of the election could also impact Macron’s ability to push through legislation and his ability to pick a like-minded prime minister.

The election will take place over two rounds beginning June 30, and culminating on July 7.

The CAC 40 equity index in Paris slumped as much as 2.4%, with shares in top French banks shedding as much as 9%. Yields on 10-year French bonds surged to their highest of the year, boosting the premium that investors demand to hold them relative to their German equivalent to the highest since January.

What Bloomberg Strategists Say:

“Traders have been swift to affix a political risk premium to euro-zone assets in the aftermath of the weekend parliamentary elections, which will keep options prices elevated over the next month or so.”

— Ven Ram, a cross-asset strategist for MLIV in Dubai

Here’s what other analysts and strategists have to say:

Mohit Kumar, chief economist and strategist for Europe at Jefferies:

“Macron called for French elections, which would be negative for French spreads as a right wing majority in the Parliamentary would hamper any reform plans. The deficit picture in France is already weak and this would further add to market concerns. We have been short France over the last few months and remain with our bearish stance.”

Nicole Kornitzer, portfolio manager at Kornitzer Capital Management:

“It is clear that Macron has been losing power. The market is reacting to this. Whether or not another party can get enough power to actually pass laws, that is another story.”

Vincent Mortier, chief investment officer at Amundi:

“Markets will be prudent but not panicked. French stocks will likely underperform European peers to some extent and the spread between yields on French and German sovereign debt could widen modestly. There will, of course, be an impact. But from my point of view, it won’t be a major one.”

Sonja Marten, head of FX and monetary policy research at DZ Bank:

“Should the election in France result in a win for Le Pen and should this add to strife within the Eurozone, then yes, I think this will impact the Euro negatively. But for that to translate into less rate cuts from the ECB, the depreciation of the Euro would have to be quite pronounced.”

Alberto Tocchio, portfolio manger at Kairos Partners:

“The composition of parliament will be crucial to understand the new trajectory as the French budget was voted in December and the far right has reached popularity on the inflation and loss of purchase power which may lead to a new budget trajectory. In the short term we might see an impact on the spread between OATs and Bunds as the period from June to October is heavy for OAT issuance.”

Ulrich Leuchtmann, head of FX research at Commerzbank:

“The euro suffers when the question arises as to whether a politically created transnational currency can survive in the long term if the political framework conditions change. So far, the rampant euro skepticism has not caused any significant damage to the euro. However, the risk that this will not remain the case increased yesterday. Only marginally, but to a visible extent.”

Thomas Zlowodzki, head of equity strategy at Oddo BHF:

“Emmanuel Macron calling snap legislative elections in France ratchets up political risk in Europe and opens up a period of uncertainty […]. In the short term, European equities, first and foremost French ones, will be hit: we recommend easing positions. The OAT-Bund spread will also widen.”

Chris Turner, global head of FX strategy at ING:

“While Marine Le Pen’s National Rally party has shifted away from the anti-euro manifesto it ran on in 2017, fears about shifting support for Ukraine stand to unnerve markets. Today EUR/USD may well have another leg lower to the 1.0700/0720 area once US investors fully have a chance to appreciate events in European politics.”

–With assistance from Greg Ritchie, Michael Msika and Julien Ponthus.

(Updates with context from from first paragraph.)

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