Stocks and the euro experience a shocking drop with the unexpected outcome of the French election.
The French election may witness substantial gains for the far-right, potentially leading Macron to deal with a hostile parliament, complicating his government's efforts to advance its policy agenda and casting doubts on the ability to stabilize the nation's finances.
Early Monday, the CAC 40 index of the top 40 Paris-listed companies dipped by 1.8%, with banks enduring the brunt of losses. Similarly, Europe's Stoxx 600 commodified index decreased by 0.6% at the same time.
Shares of Societe Generale sank by 7.4% in Paris during noon, whereas BNP Paribas and Credit Agricole slumped by 4.7% and 4.1%, respectively.
The euro fell 0.5% against the American dollar early in the afternoon, marking a one-month low, while against the British pound, the dual currency declined 0.4% to its poorest performance since early 2020.
Following Sunday's exit poll indicating Renaissance, Macron's party, on the verge of defeat by the far-right National Rally in European elections, the French leader disbanded the parliament and called for fresh elections. Primarily, the first round of the French election is set for June 30, followed by the second round on July 7.
Distinctivley, France's National Assembly selection entails the election of its 577 assembly members, whilst the country's presidency is slated for 2027. Hence, the assemblage of a new executive could make it challenging for Macron to govern.
"There's a considerable quantity of moving parts, and the final outcome is still elusive," claimed Mike O'Sullivan, Moonfare's main economist. "Even if the right-wing parties do not excel outstandingly, Macron would face a varied assemblage of center parties, which would lead to a hung parliament. Clarifying which key policies unite these parties are uncertain," he added.
Markets flinched due to the turmoil, according to O'Sullivan. "Macron's administration has been advantageous to parts of the French economy. For instance, joblessness is at a historical minimum, specific economic segments – particularly those related to technological investment – experienced substantial growth. However, such optimism is now uncertain," he opined.
Bond Worries
Moreover, the impact of a potential seismic parliamentary change on France's capacity to redirect its sizable government debt has piqued the curiosity of analysts. The debt burden was 110.6% of their GDP's measure as of last year's close.
Simultaneously, the fiscal deficit, which signifies the disparity between the government's expenditure and tax intake, escalated to 5.5% of the GDP last year.
In May, credit rating agency S&P dimmed France’s financing rating, pinpointing the "erasure in its budgetary situation," although it remains optimistic regarding France's capacity to pay back its debts. The agency indicates a narrowing of the fiscal deficit to 3.5% of the GDP in 2027, in contrast to the government's 2.9% ambition for that year.
Andrew Kenningham, a Consultancy Capital Economics' Chief Europe Economist, penned, "The foremost misgiving for the economy is that (a new parliament) could render it more intricate for the government to contract the fiscal deficit."
Bond investors seem to have responded. The yield, or interest rate, on France's benchmark government opt was elevated on Monday to reacbh its highest level since late November. Greater rates reflect investors' desire for a premium to acquire French bonds due to the political clamor.
Additionally, the spread, or the gap, between the yields on French and German government bonds broadened further (the former's interest rate is higher), signifying higher risk for investors in holding the French bonds.
"A dominantly right-wing National Assembly would stifle any reform initiatives," Mohit Kumar, Milestone's Chief Europe Economist at an investment bank, jotted down in his communication.
