France on standby? The reactions of the financial market

The results of the parliamentary elections in France have thwarted the predictions of the polls and the markets: a victory for the left, but without a majority. Emmanuel Macron's anti-Rassemblement National strategy partially paid off, placing this party in third place. However, the absence of an absolute majority creates a delicate political situation, with many uncertainties for the weeks to come. The French president has been weakened by these events, and if he fails to form a government, he may be forced to set up a government of “technicians”. In any case, the new government will probably not be able to implement the necessary reforms and will be limited to managing current affairs, with negative consequences for the economy and public finances.

Reactions from the financial markets

The surprise announcement of the dissolution of the National Assembly and the holding of early parliamentary elections were harshly received by the financial markets. This resulted in a fall in the euro, an increase in the risk premium on France (the rate differential between France and Germany), and a general fall in the French market, particularly for companies exposed to the domestic economy such as banks, real estate companies and utilities. The French index began to rebound as investors realised that the worst-case scenarios involving a potential fiscal derailment were receding. Despite this recuperation, the index still remains below its June 9th announcement levels.

Not all doubts have been dispelled

Despite a reduction in risks, uncertainties persist. The markets are concerned about the potential political impasse and the chronic budget deficit situation. This deficit could even continue to deteriorate further than economists were forecasting before the dissolution of the National Assembly. In this environment, we believe that the risk premium on France could at best stabilise at current levels, but that it will not return to its pre-election level in the foreseeable future. It's also difficult to imagine the euro appreciating against the major currencies. Moreover, foreign investors will probably prefer to keep their distance from the French stock market while waiting for more clarity on the political agenda. At this stage, we favour French companies with international exposure over French domestic stocks, which are likely to suffer from economic weakness or potentially a rising risk premium.

Outlook

As political uncertainties diminish, the "Goldilocks" scenario should gradually regain the upper hand. This scenario, characterised by moderate growth, controlled inflation and falling interest rates, should create a favourable environment for financial markets. Against this backdrop, investment opportunities could arise in the medium term, particularly in stocks that have suffered excessive declines. For the moment investors must be patient.