Why France´s snap elections are shocking the markets

The result of the EU elections in France shocked President Macron – even before the end of the count! – to such an extent that he decided to dissolve the parliament, thereby calling for new elections. The fact that the radical right under Marine Le Pen was able to garner almost a third of the votes, while his alliance did not even reach 15%, was too much. This also affected the capital markets – the French stock index plummeted and government bonds are being traded with additional risk premiums. What happens next?

Since the dissolution of parliament, political commentators have been debating whether this was a brilliant move or political suicide, with the tendency increasingly leaning towards the latter, based on quickly gathered poll results. Many argue that by calling these early elections, Macron has counteracted his long-standing and frequently invoked goal of keeping Marine Le Pen off the state throne. The hope that voters will once again unite “against the right” in the runoff election (France also has a majority voting system for parliament) may not materialize this time, especially since the likely alternative will often be far left. As a result, it appears that the very strong president, according to the French constitution, will have to work with an unfavorable government until the next presidential election in the spring of 2027.

Political unpredictability costs

France’s leading stock index, the CAC 40, which was already among the weaker Western European indices in the first five months of this year, temporarily fell by up to seven percent in the week following the EU elections and thus traded below the level at the start of 2024.

On the bond side, investors somewhat withdrew their confidence in the French state, and the risk premiums for government bonds in the ten-year range rose from just under 50 basis points (compared to Germany) to just under 80 basis points. This corresponds to a price drop of about 2.5 percentage points. Additionally, France was already under scrutiny and had to accept a rating downgrade from Standard & Poor’s at the end of May due to its unsolid state finances. National debt has risen from under 100% of GDP to about 113% in the last five years, amounting to over 3 trillion EUR. The current concern is that after the early elections, not only will political consensus be relatively difficult to achieve, but it will also negatively impact the fiscal situation and lead to unchecked spending – and this after an official deficit procedure was just initiated against France.

Compensating for the French dilemma

Speaking of the EU, there is also great concern about the French election day next Sunday – and the runoff seven days later. If the forecasts are correct and there is a government in France positioned at either the far right or far left, reaching an agreement with one of the founding states of the European Union on several (core) issues will become much more difficult. This concern is already reflected in the development of the euro, which has lost value against the USD and most other major currencies since the EU election two weeks ago.

Through broad diversification in our portfolios, across asset classes, currencies, countries, and maturities, we have, of course, felt these movements, but on the other hand, we have been able to benefit from new all-time highs in the US markets and the “flight to quality,” thus overcompensating for the French dilemma for the time being.

This information is a marketing communication from Kathrein Privatbank Aktiengesellschaft. It does not contain a direct or indirect recommendation for the purchase or sale of financial instruments or an investment strategy. When investing in financial instruments, price fluctuations due to market changes are always possible. The presentation of past performance does not allow reliable conclusions to be drawn about future results. Despite careful research and collection, no liability or guarantee can be assumed for the accuracy of the data.