Early signs Sunday night The second round of voting in the French parliament has caused some major surprises, leaving political commentators considering a “hung parliament” scenario, which could pose challenges for both policymaking and financial markets.
Some predictions have France’s left-wing New Popular Front coalition winning the most seats in the election, with French President Emmanuel Macron’s Ensemble party and its allies in second place and the far-right National Rally party in third. With no group expected to reach the 289 seats needed for an outright majority, deadlock is likely in the coming weeks.
EUR Down approximately 0.3% from the previous month Dollar Trading volume was light on Sunday evening after the exit polls were released.
On the eve of the second round of voting, Citi analysts warned that stock markets may be a little too optimistic about the French election and that “higher likelihood outcomes” such as deadlock “would mean a 5-20% drop in equity market valuations.”
“Combined with our findings that French stocks tend to be more volatile than other countries’ stock markets around elections, this may be reason to expect further volatility in the future… For context, French stocks typically experience 10% volatility, with An 8% move overall Stoke 600“, analysts said in a report on June 26.
Analysts at investment firm Daiwa Capital Markets also spoke of the uncertainty if no party can secure an outright majority. A grand coalition of moderate left-wing and centrist parties, a coalition or a minority government were all possible outcomes, analysts said in a research note earlier this week.
“In any case, uncertainty about the outlook for French decision-making is likely to remain for a long time,” analysts said.
concerns about spending
The tax and spending plans of the left-wing New Popular Front and the far-right National Alliance party (RN, or National Rally) have been a key issue since snap elections were announced.
France faces a challenging fiscal situation, and the European Commission announced two weeks ago that it intends to place France under excessive deficit procedures due to France’s failure to control the budget deficit within 3% of gross domestic product. The EDP is an action initiated by the European Commission against any EU member state that exceeds its budget deficit ceiling or fails to reduce its debt.
Eurozone Vice President Jack Alan Reynolds said: “A fractious parliament means it will be difficult for any government to pass the budget cuts that are necessary for France to comply with EU budget rules and put its public debt on a sustainable path. .
“The likelihood of the French government (as well as other governments) clashing with the EU over fiscal policy has increased as EU budget rules have been re-introduced and some countries, including France and Italy, will fall into excessive fiscal deficits. program,” he added.
bond rout
Unease has spread across French government bond markets in recent weeks. The country’s borrowing cost premium compared with Germany has recently reached its highest level since 2012.
Since Macron announced a snap election in mid-June, France’s benchmark 10-year government bond yield has also risen to above 3.3%, about an 8-month high.
David Roach, president and global strategist at Independent Strategies, said in a note on Sunday that early signs of a Syriza victory could actually be worse economically than the National Rally government. He said any relief measures to avoid an outright victory for the far-right National Party would be short-lived and recommended shorting French government bonds and German bonds “with a spread of only 70 basis points.”
Short selling involves betting that the price of an asset will fall.
“This is a hung parliament, with some shaky coalitions negotiated by a disgraced president, but no policy agenda,” he said.
Holger Schmieding, chief economist at Berenberg Bank, believes a hung parliament is the most likely and least negative scenario since Macron first called the election.
“However, this is still not a good outcome, to put it mildly. It means the end of Macron’s pro-growth reforms. Any government, whether still led by current Prime Minister Gabriel Attal, or by a more popular Candidate leadership, center-left – will have a hard time getting much done,” his team of analysts said in a recent research note.
AMP chief economist and head of investment strategy Sean Oliver said a hung parliament would not be good for reform and deficit reduction. But he said that could be seen as the least bad outcome for markets “because it would reduce the likelihood of fiscal policy conflicts and discourage extremist natural resource policies.”
—CNBC’s Jenni Reid and Holly Ellyatt contributed to this article.
Correction: This article has been updated with correct historical data on French bond yields.
