Tuesday, July 16, 2024

French stocks, euro rise on election results


Antoine Bureau/Hans Lukas/AFP/Getty Images

The Euronext building in Paris that will host the Paris Stock Exchange in June 2024.


French stocks and the euro rose on Monday after the results first round French election results suggest the far-right will inflict a heavy defeat on President Emmanuel Macron but will fall short of an absolute majority in parliament.

France’s CAC 40, which represents 40 of Paris’s biggest listed companies, rose 2.7% at the open. The index closed up 1% but is still about 6% below its level before Macron called for early elections on June 9.

Bank stocks, which are an indicator of the economy, reversed some of the heavy losses they incurred in recent weeks. BNP Paribas shares closed up 3.6%, while Société Générale and Credit Agricole shares rose 3.1% and 2.8%, respectively.

The euro that landed After Macron’s surprise election announcement, it briefly touched its strongest level against the dollar in more than two weeks on Monday.

French government bond yields, or the returns investors demand for the risks of holding them, were broadly unchanged after having widened significantly compared to their ultra-safe German counterparts in recent days. On Friday, the risk premium on German government debt reached its highest level since the eurozone crisis more than a decade ago.

While a Macron defeat would likely be bad news for France’s fragile finances—a hung parliament could mean gridlock—the worst-case scenario for investors appears to have receded. Just two weeks ago, they were worried that France was headed for a financial crisis. Financial crisis Similar to the UK market crash of 2022 caused by unfunded tax cuts pushed by former Prime Minister Liz Truss.

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After an unusually large voter turnout on Sunday, the far-right National Rally party led by Marine Le Pen topped the first round, obtaining 33.15% of the votes, while the leftist New Popular Front coalition came in second place with 27.99%. Macron’s coalition fell to a dismal third, at 20.76%, according to final results published by the French Interior Ministry on Monday.

“The outcome may be better than feared (for markets) but not as good as the situation three weeks before the election,” Mohit Kumar, Jefferies’ chief economist for Europe, wrote in a note on Monday. “The immediate reaction is a relief rally.”

Going into the first round, investors feared that voters would elect a far-right or far-left parliament committed to spending more, further ballooning the already high debt and budget deficit – the difference between what a government spends and what it receives in a year. Taxes.

At the end of last year, France’s government debt stood at 110.6% of GDP. The budget deficit was 1.2% of GDP. reached 5.5% of GDP, one of the highest among the 27 countries in the European Union.

Sunday’s vote may have mitigated the risks of extreme fiscal policies in Europe’s second-largest economy, but investors remain concerned that a divided new parliament will not be able to address the country’s debt problem.

“We may still be looking at the next few years of political paralysis in France as the reform process stalls,” Kumar said, referring to Macron’s policies to boost economic growth.

Many other analysts also see the most likely outcome as a hung parliament, meaning no single party would win a majority of seats.

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This could lead to a “dead end,” according to Berenberg’s chief economist, Holger Schmieding. “In this case, no new government will be able to accomplish much,” he wrote in a note on Monday.

It would be worse than deadlock if Le Pen’s National Rally joined with parts of the left to cut taxes and roll back some of Macron’s reforms, such as Raising the retirement age To 64 years for most workers.

The National Rally Party pledged to reduce the value-added tax on electricity, fuel and other energy products. From 20% to 5.5% And Completely commented In order to obtain many basic necessities. At the same time, the leftist New Popular Front was announced Pledge To increase the minimum wage and freeze the prices of many basic goods.

The third scenario — dubbed “Marine Meloni” — could see Le Pen follow the example of Italian Prime Minister Giorgia Meloni and focus on signature policies such as taking a tough stance on immigration while tempering “more costly or disruptive fiscal promises.” To win the presidential elections in 2027, according to Schmieding.

He added: “The three main scenarios mentioned above involve a gradual deterioration in the outlook for France… but they do not indicate an immediate crisis similar to the Les Truss crisis.”

In the long run, there may be a partial rollback of some of Macron’s reforms, leading to lower economic growth and higher inflation.

“Along with the possibility of a credit rating downgrade, this would increase the cost of financing and exacerbate France’s financial problems over time,” he added.

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Rating agency Standard & Poor’s His level has been downgraded. The French government downgraded its credit rating in May, citing a “deterioration in its budget position,” although it still believes the country has sufficient capacity to repay its debts.

With the final round of voting scheduled for July 7, the result of the French elections is still uncertain, as the door is still open for the National Rally led by Le Pen to win a majority.

“We doubt that this morning’s improved sentiment will continue as we head into the next round of voting,” Rabobank analysts wrote in a note.

Anna Copan contributed to this report. This story has been updated with additional information.

Rainerio Manuel
Rainerio Manuel

"Infuriatingly humble alcohol fanatic. Unapologetic beer practitioner. Analyst."