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Earlier this week, the news spread around the world that the French president had dissolved parliament and announced snap elections, the first round of which would be held on June 30. This decision came after Macron's opponent Marine Le Pen's National Rally party won a clear majority of seats in the European Parliament. This sent a clear signal that the far right currently has the upper hand in French politics. However, such an early election date gives little time for the various political opponents to prepare and organise. On this basis, we can see this move by Macron as a strategic decision. Nevertheless, many analysts see it as a dangerous game. On Tuesday, the president said that even if his party does not win the necessary number of seats in parliament, he does not plan to resign from his position, which calmed the European markets a bit.
Only recently, the rating agencies downgraded France's credit score from AA to AA-. Now analysts are warning that the new populist government could challenge the stated plan to reduce the national budget deficit, which was already approved by Parliament at the end of last year. The plan foresees a deficit of 5.1% of GDP this year and a deficit of 4.1% of GDP in 2025. A higher deficit in the treasury could force the European Union to intervene and activate the so-called Excessive Deficit Procedure (EDP). France is also struggling with a national debt of 110% of GDP. The yield on France's 10-year government bonds rose over the week and reached its highest level since November 2023.
Performance of 10-year French bonds over 5 years. *
Source: tradingeconomics.com
The CAC 40 index, which includes France's largest companies, slumped after Sunday's announcement of snap elections and was at its lowest levels in five months on Friday. Other European stocks, such as those in the Euro Stoxx 600 index, were not spared, but the impact on those was softer. Losses in European markets were mitigated by positive inflation data from the US, as it turned out to have fallen more than expected in May and hopes for a US Fed interest rate cut this year were rekindled. However, the CAC 40 continues to be the worst performer among the European major indices.
Performance of the CAC40 index over 5 years. *
Performance of the STOXX 600 index over 5 years. *
Source: iinvesting.com
In the light of these events, the value of the euro has also fallen against other currencies, especially the U.S. dollar. The EUR/USD currency pair reached its lowest level since the beginning of May. However, the political events in France were not the only reason for this decline. While the euro weakened, the dollar strengthened on the back of strong US employment data, which supported expectations that the Fed will leave interest rates unchanged for now, despite the aforementioned positive inflation data. British sterling also strengthened against the euro, with the EUR/GBP pair trading at its lowest level in almost 2 years. The pound is gaining in value mainly due to high interest rates in the UK, which are set to remain above Eurozone levels for some time yet.*
Source: iinvesting.com
Events on the French political scene and their impact on the markets are the proof that country is one of the main drivers for the European economy. The European Union is slowly recovering from the problems caused by the pandemic, the war in Ukraine and the related energy crisis. Possible political instability in an important member state such as France could slow down the whole process and prevent further economic growth. It is therefore important to realise that a seemingly clear-cut development of events may encounter an unexpected variable. [1]
* Data relating to the past are not a guarantee of future returns.
[1] Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements are not guarantees of future performance. Forward-looking statements inherently involve risk and uncertainty because they relate to future events and circumstances that cannot be predicted and actual developments and results may differ materially from those expressed or implied in any forward-looking statements. Warning! This marketing material is not and must not be construed as investment advice. Data relating to the past is not a guarantee of future returns. Investing in a foreign currency can affect returns due to fluctuations. All securities transactions can lead to both profits and losses. Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements are not guarantees of future performance. InvestingFox is a trademark of CAPITAL MARKETS, o.c.p., a.s. regulated by the National Bank of Slovakia.
Sources:
https://finance.yahoo.com/news/bofa-concerned-uncertainty-surrounding-france-070458080.html
https://tradingeconomics.com/france/government-bond-yield
https://www.marketscreener.com/quote/index/CAC-40-4941/components/
https://www.google.com/finance
https://europeanbusinessmagazine.com/finance/eur-usd-forecasts-between-french-elections-and-us-data/
