Markets put to the test by the French vote. What scares investors

Markets put to the test French voteתNot even a month has passed since the European elections, which returned a complicated and unstable political scenario due to the advance of the sovereignist far right, and now the stock markets find themselves having to deal with the early elections in France, called by President Emmanuel Macron precisely in consideration of the negative outcome of the European vote.

Ressemblement National, Marine Le Pen’s party, obtained over 30% of the vote, and in light of the election results Macron decided to dissolve Parliament and call early legislative elections scheduled for tomorrow (first round) and 7 July (second round). Around 50 million French people are called to vote to renew the National Assembly.

Most polls show the Rassemblement National on track to win a majority in the 577-member National Assembly. It is expected a high turnout at the polls and final opinion polls give the RN between 35% and 37% of the vote, against 27.5-29% for the left-wing alliance of the New Popular Front and 20-21% for the president’s centrist camp.

The largest public debt in Europe

Macron has called a government meeting for Monday to decide on a course of action ahead of the second round of voting on July 7. The French political situation appears particularly delicate given that France is not in a position of sound public finances, with public debt as a ratio of national GDP around 110.6% in 2023.

The French public debt per capita has risen to 45,000 euros and is expected to reach 50,000 within two years. Last year, the government closed the financial year with a deficit of 5.5% of GDP, prompting the European Union to launch an infringement procedure. Considering also spreads always very low against Germanythe issues have been poorly invested by domestic investors and today 50.5% of French public debt resides in foreign hands and is therefore potentially more exposed to greater speculative instability.

The French debt, in absolute value, is the largest in Europe, equal, at the end of 2023, to 3,101 billion eurosIn 2024, the public deficit will exceed 5 percent of GDP, one of the highest values ​​in the Eurozone, while debt, close to the 110 percent threshold, is expected to continue to increase in the coming years.

The French rating

According to the rating agency Fitch, the decision to call early parliamentary elections increases uncertainty about the country’s fiscal consolidation path and the prospects for further economic reforms. However, there are no immediate implications for France’s “AA-“/stable rating. Moody’s also warns that a prolonged period of political instability after the elections could have “a negative impact” on the operating environment of French banks. Currently, Moody’s maintains a rating Aa2 over Francea step above those of S&P and Fitch, but the election outcome is “credit negative” and could lead to a cut in the outlook from stable to negative and in the long run to a lowering of French creditworthiness.

The outcome of the elections is far from certain and the risk of facing a financial crisis in the heart of Europe scares the markets. The two coalitions that could win the elections have populist economic programs, in a difficult situation of public finances.

Investors’ fears

Investors are worried because the Rn manifesto does not include in its program the securing of the state budget. On the contrary, it proposes, for example, significant cuts in some taxes, prolongation and extension of subsidies for family energy consumption, and maintenance of one of the lowest retirement ages in the European Union.

But at the same time, what is also frightening the financial markets is a possible victory of the left-wing coalitionthe New Popular Front, which presents a particularly radical program with greater fiscal progressivity, a price freeze on essential goods, pension reform, an increase in the minimum wage and the expansion of the public sector with the nationalization of the main infrastructures. The markets, observes Luca Vallarino, head of the Trading Desk and manager and member of the Investment Committee of IMPact sgr, “do not like political instability and uncertainty, which adds to the poor visibility on interest rates and consequently the European indices have generally been subject to significant sales on the market, losing an average of 4%”.

The victory of the Rassemblement National could certainly increase volatility, with Le Pen intending to cut contributions to the EU budget and eager to pursue a populist and fiscally expansionary agenda. According to analysts, French assets would maintain their risk premium, which would be higher in a scenario where the Rassemblement National were to achieve a clear majority in Parliament, rather than being the largest party in a fractured and dysfunctional assembly, which would struggle to achieve anything.

According to Ebury analyst Micha Jozwiak, the market impact of the French elections will be neutral at best. In particular, the least bearish scenario would be a Parliament without a majority, but with a better-than-expected result for Macron’s coalition. If the outcome of the vote were to be uncertain, next week’s market trend could even be the opposite of that recorded this week, that is, profit-taking on Wall Street and a rebound in the Eurozone.