The French markets experienced a sell-off after President Emmanuel Macron announced an early parliamentary election following a defeat by Marine Le Pen’s far-right party in the EU parliamentary vote. This led to the Cac 40 falling to its lowest level since late February, with all 40 member stocks in negative territory. Banks and utilities groups were especially hard hit, with BNP Paribas, Société Générale, and Crédit Agricole all seeing significant declines.
Emmanuel Cau, head of European equity strategy at Barclays, commented on the market reaction, noting that there was a “shoot first, think later” mentality, leading investors to price in a higher risk premium. French government bond yields surged, with the benchmark 10-year bonds reaching 3.18 percent, close to the highest level since November. Italian bond yields also rose, reflecting concerns about Eurozone political risks.
The election announcement came shortly after S&P Global downgraded France’s sovereign credit rating, citing concerns about the country’s budget deficit. Cedric Gemehl, analyst at Gavekal Research, expressed doubts about Macron’s ability to achieve fiscal consolidation, especially considering the current plan to reduce the public deficit from 5.5 percent of GDP in 2023 to 3 percent in 2027.
In response to the European election results, the Stoxx Europe 600 lost 0.6 percent, with Germany’s Dax and London’s FTSE 100 also seeing declines. While the shift to the far right had been anticipated, it was still impactful on the markets. Cau suggested that while a major policy U-turn seemed unlikely, there could be implications such as a tougher stance on immigration.
The euro fell against the dollar in currency markets, with the political uncertainty in Europe weakening the case for holding anything other than the high-yielding dollar. Chris Turner, head of FX strategy at ING, highlighted the impact of the US economy’s strong performance on investor sentiment. Overall, the market reaction to Macron’s election announcement and the European election results reflected concerns about political instability and economic uncertainty in the region.
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