Forget the UK general election.
The survey that financial markets will follow most closely in the coming days is the second parliamentary round in France This Sunday.
The French poll is unpredictable, to say the least.
O first round of voting last week raised the prospect of a suspended parliament and provoked an outpouring of relief among French assets on Monday this week.
Markets would prefer a suspended parliament because Marine Le Pen’s far-right Rassemblement National (RN or National Rally) and the New Popular Front (NPF) – an alliance of far-left Insubmissive France, the Greens and the Socialists – want both aggressively increase taxes and public spending.
But uncertainty remains in the air as the NPF and the French President Emmanuel MacronThe centrist alliance Ensemble (Together) of the RN is fighting to avoid a triumph for the RN.
What’s next in the French vote?
Under French electoral rules, where no candidate won outright in the first round, a second round is held between the two best-placed candidates and any other candidates who obtained more than 12.5% of the vote during the first round. round. Whoever gets the most votes in the second round wins.
So both the NPF and Ensemble have rejected most candidates in places where they finished third last time – in the hope that their supporters will vote tactically to keep the RN out.
Le Monde, the second best-selling newspaper in France, reported yesterday that 224 candidates withdrew.
Tactical questions
The tactic may not work, however, because the conservative Les Republicains – the party of former presidents Jacques Chirac It is Nicolas Sarkozy and which obtained 10.2% of the votes last Sunday – did not give such guidance to its supporters and could thus divide the anti-RN vote.
Furthermore, many liberal and conservative voters will be reluctant to vote for the NPF candidate when they come from Unruly France, led by 72-year-old left-wing firebrand Jean-Luc Mélenchon, who is often characterized as a French version. in Jeremy Corbyn and who set up the alliance.
Edouard Philippe, Macron’s former prime minister, urged Ensemble candidates to step down where they were in third place during the first round and to come behind center-right or center-left candidates – but not RN or center-left candidates. Unsubmissive France.
A nervous watch
Le Monde estimates that, of the remaining disputes, around 409 will now be decided by a two-way duel. There are 89 three-party competitions and two four-party battles.
With pollsters expecting RN to get somewhere between 250 and 300 seats in the National Assembly – 289 are needed to gain a majority and it came first with 296 seats in the first round – this has left markets watching nervously.
Since Macron surprised Europe, on June 10, by calling a parliamentary electionAfter Ensemble suffered a drubbing in the European parliamentary elections, investors were rattled by the prospect of either the RN or the NPF gaining a parliamentary majority.
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Market reactions so far
The CAC-40, the main French stock index, fell more than 6.5% between June 10 and last Friday – the last day before the first round of voting.
However, some individual stocks have fallen more, with banks Societe Generale and Credit Agricole falling 10% and 7% respectively since Macron called the elections. Construction-to-telecommunications conglomerate Bouygues also fell 10% and Vinci, the construction and infrastructure services group owned by British civil engineer Taylor Woodrow, fell more than 7.5%.
There was also a sell-off in French government bonds – reflecting concerns that a high-spending RN or NPF government would increase debt.
The yield (bond yields rise as the price falls) on 10-year French government bonds jumped from 3.118% the day before Macron’s call to action to 3.373% on Tuesday this week.
And the premium that investors demand for holding 10-year French government bonds relative to their German equivalent has risen from 47.61 basis points (0.4761%) before Macron called the election to 85.2 basis points (0.852 %) last Friday – a sharp rise and pronounced movement that highlights investor anxiety and takes the spread to its highest level in 12 years.
A French-style mini-budget moment?
It has led some investment analysts to speculate that France could suffer its own mini-budget moment – where bond investors sell government debt for fear that additional debt will spiral out of control.
The uncertainty even had an impact on the euro, which fell from $1.09, just before the European elections, to $1.067, days after Macron called the poll, although it has since risen to around $1.079.
Some analysts now argue that French assets represent good value, assuming the second round of voting produces a hung parliament or a modest majority for the RN, which is considered a more market-friendly outcome than a victory for the NPF.
Marina Zavolock and Regiane Yamanari, strategists at Morgan Stanley, told clients today: “We believe that the two main remaining French election scenarios – no majority and absolute RN majority – would both ultimately be followed by a recovery in stock indices French and European.”
Existing concerns
But there are still widespread concerns – and they are so serious that the European Central Bank even faced questions this week at its Annual Central Bank Forum in Sintra, Portugal, about whether it would be prepared to intervene in markets, if necessary, to support French government bonds. .
France is already subject to a so-called “excessive deficit procedure” with the European Commission for having a budget deficit of 5% of GDP – far above the 3% limit set by the Maastricht Treaty. This already put it on a potential collision course with Brussels in the event of a victory for the RN or the NPF.
Some leeway ‘because it’s France’
France has traditionally enjoyed a certain margin of maneuver in relation to Brussels on the insolvency of excessive deficits due to its importance for the eurozone – where it is the second largest economy, behind only Germany.
This attitude was famously summed up by Jean-Claude Junckerformer president of the commission, when asked in 2016 why France was not forced to follow the same rules as, say, Greece or Portugal: “Because it’s France.”
But Reuters reported today that some of the ECB’s governors are expected to insist that the central bank should not intervene until Paris has discussed some kind of agreement with the Commission over its deficit.
However, during a panel discussion, Christine Lagarde, president of the ECB, indicated that the ECB could intervene and especially if a settlement of French government debts spreads contagion to other eurozone debts – only as did his predecessor, Mario Draghi in 2012.
Lagarde said: “The European Central Bank has to do what it has to do. Our mandate is price stability. Price stability obviously depends on financial stability and we are paying attention to that.”
Therefore, the markets were alerted.
The general picture, however, is that bond investors will remain concerned about the French deficit regardless of the outcome on Sunday.
This story originally appeared on News.sky.com read the full story
