French Political Shockwave: Macron's Election Move Sends Stocks Tumbling and Tests Euro.
In an unexpected turn of events that sent shockwaves through financial markets, French President Emmanuel Macron has taken the unprecedented step of dissolving parliament and calling for a snap election. This approach comes after his party's astonishing defeat to the far-right National Rally in the recent elections for European lawmakers. The far right's ascendancy in France could mandate Macron's centrist government to operate with a predominantly hostile parliament. Such a political landscape complicates the administration's endeavor to advance its policy initiatives and casts doubt over its competence in steering the nation toward fiscal sustainability.
Various sectors palpably felt the repercussions of this political upheaval on the financial front. The CAC 40 index, symbolic of the 40 paramount companies listed on the Paris stock exchange, witnessed a decline of 1.8% as of 11:02 a.m. ET. Notably, the banking sector bore the brunt of significant losses. Concurrently, the Stoxx 600 index, a bellwether for European equities, receded by 0.5%.
The euro, serving as the common currency for 20 European nations, also found itself in the doldrums. It depreciated by 0.6% against the US dollar, hitting a month-low in the late afternoon trade. Against the British pound, the euro's diminution was equally pronounced, marking its lowest point in almost two years.
The schedule abruptly places the principal round of this French election on June 30, with the subsequent round set for July 7. These legislative elections are critical for determining the composition of the National Assembly, France's lower house of parliament, consisting of 577 members. It is worth noting that this election is conspicuously detached from the presidential election cycle, with the next presidential election not due until 2027.
The potential alteration in the National Assembly's composition underlines the challenges President Macron may face in governing effectively. According to Mike O'Sullivan, chief economist at Moonfare, the outcome of the forthcoming parliamentary election is still being determined. He elaborated on the complexities surrounding the formation of a new government, mainly if it necessitates a coalition amongst the centrist factions, each with divergent key policy priorities.
O'Sullivan remarked that this political uncertainty has induced a sense of unease in the markets, emphasizing that the Macron administration has been instrumental in bolstering specific sectors of the French economy. He cited the historically low levels of unemployment and the burgeoning tech investment landscape as testaments to the government's economic stewardship. The current predicament, however, threatens to unravel these achievements.
The tremors were particularly acute within the banking sector. Shares in Société Générale plummeted by 8% by late afternoon in Paris, while BNP Paribas and Credit Agricole saw their shares diminish by 5.5% and 4.4% respectively. Johann Scholtz, an equity analyst at Morningstar, attributed these declines to investor apprehensions regarding the National Rally's interventionist economic policies, which could encompass windfall taxes and constraints on dividends and share buybacks.
Moreover, the bond market exhibited signs of jitteriness. The yield on France's benchmark government bonds ascended to its apex since late November, signaling investors' demand for a higher premium amidst the burgeoning political uncertainty. The differential in yields between 10-year German and French government bonds widened, a conventional indicator of elevated investment risks associated with the latter.
This confluence of political and economic tumult underscores the precarious position in which France finds itself.
As analysts and investors ponder the ramifications of a Parliament potentially dominated by the far-right, the consensus underscores the gravity of the challenges ahead. Already a point of contention, the fiscal deficit's trajectory could be further complicated, exacerbating concerns among market participants. Mohit Kumar, chief Europe economist at Jefferies, succinctly encapsulated the prevailing sentiment, indicating that a right-wing majority in the French parliament would impede Macron's reform agenda and amplify existing anxieties surrounding France's fiscal health.
Sources: https://www.nytimes.com/2024/06/11/business/france-economy-macron.html
https://www.moonfare.com/blog/eu-elections-matter-for-private-assets
