Finance
European markets rise after Le Pen bet misses absolute majority
(Bloomberg) — French markets recovered and the euro gained thanks to betting. Marine Le Pen’s National Rally was on the verge of winning the first round of France’s parliamentary elections by a smaller margin than some polls had indicated, making it less likely that the far right would score a victory. absolute majority.
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CAC 40 stock futures rose almost 3% and the euro rose 0.6% to $1.0772, the highest level since mid-June. The French 10-year government bond rose slightly, narrowing the yield spread with German banknotes to 73 basis points, the lowest in two weeks. A measure of European credit risk fell to the lowest level since June 13.
Initial projections showed Le Pen’s far-right party facing President Emmanuel Macron’s centrist alliance and the left-wing New Popular Front – but with potentially fewer votes than needed to win an absolute majority after a second round of voting on July 7 . That would slow the legislative process and limit the National Rally’s ability to push through its policies.
Investors are concerned that a strong turnout for Le Pen’s National Rally would increase the chances of expansionary fiscal policy, bringing the country’s bloated fiscal accounts into sharp focus and further clouding the prospects for the single currency.
“We now have a week of horse trading ahead of us,” said Joachim Klement, head of strategy, economics and ESG at Panmure Liberum. He expects the euro to strengthen during the week as alliances are formed to reduce Le Pen’s party’s gains.
What Bloomberg Strategists Say…
If the left-wing alliance “aims to prevent Le Pen’s grouping from gaining a majority in the crucial second round, it will have far-reaching consequences for the Franco-German spread and even for the euro. If the result is that we get a more centrist government, that would be positive for the currency and herald a tighter spread.”
— Ven Ram, cross-asset strategist for MLIV
According to an analysis of five polling stations late on Sunday, the National Rally was expected to receive as much as 34% of the vote. Bloomberg’s latest poll on Friday put it at 36.2%.
The left-wing coalition of the New Popular Front would get around 29% and Macron’s centrist alliance between 21% and 22%, Sunday’s projections showed.
“The fiscal policies of both camps are disruptive to the French economy and the prospects for France’s debt burden,” said Vincent Juvyns, global market strategist at JPMorgan Asset Management, referring to the National Rally party and the New Popular Front coalition. “For me it remains to be seen.”
Macron and Le Pen’s other opponents are already devising strategies to keep the far-right party out of power, with any sign of progress likely to strengthen the case for an aid meeting.
If alliances formed to block Le Pen from absolute power appear credible, French markets are likely to recover, said Kathleen Brooks, research director at XTB.
“A hung parliament could make it difficult to get anything done in France in the current parliament, which is exactly what the markets would want,” she said.
Still, strategists warn that volatility is likely ahead as the electoral calculus becomes complicated in the runoff when parties can strategically withhold candidates in certain constituencies to boost centrist hopefuls.
Volatility is the only certainty for traders analyzing French results
Macron’s decision to call a snap vote in early June had sent markets into a tailspin.
His party – which supports major cuts to get France’s budget deficit under control – suffered a crushing defeat in the European parliamentary elections. National Rally, meanwhile, has touted a number of costly budget measures, including cutting sales taxes on energy and fuel.
Over the past two weeks, the excess yield investors demand to hold 10-year French government bonds over safer German government bonds has skyrocketed to more than 80 basis points, a level last seen during the euro area sovereign debt crisis. The euro fell to its lowest point since early May.
Fiscal pressure
It is difficult to see a “material and sustainable pullback” in French yields, says Peter Goves, head of developed market government bond research at MFS Investment Management.
“The uncertainties are high, the French fundamentals have not changed and the final outcome is still unknown and unknowable as the large number of three-way matches complicates matters,” he said.
With an expected 5.3% of output this year, France’s budget deficit already far exceeds the 3% of economic output allowed under European Union rules. The International Monetary Fund predicts that without further measures, debt would rise to 112% of economic output by 2024, rising by around 1.5 percentage points per year in the medium term.
–With help from Allegra Catelli, Julien Ponthus and Farah Elbahrawy.
(Updates market movements.)
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