This article was originally published on English language
Investors were relieved by news that France has a chance to avoid a radical change in course.
The victory of the far-right in France is not guaranteed: amid speculation that supporters of Marine Le Pen will have to work hard in the second round, the market has finally recorded the growth of the euro and European stock indices. Investors feared that one of Europe’s richest economies would face a quick and radical change of course if the National Union wins the first round, but now this scenario does not seem inevitable.
Markets are now looking forward to the second round on July 7. If the “National Union” does not get an absolute majority even then, inter-party agreements will play a decisive role – they will be concluded this week by all the participants in the election race. A “hung” parliament is highly likely, a scenario that, from the perspective of investors, poses less of a threat to France’s financial stability. It would also give Macron the time and opportunity to make a difference at the next election in three years.
Market neurosis
Growth on the first day of July was a hint of stabilization after a month closed by European stock markets on a negative note. A particularly strong fall was observed in the French segment: the CAC 40 index there fell by 6.42%, the Euro Stoxx 600 – by 2.08%, and the DAX – by 1.42% in June. As a result, the euro weakened against most other G-10 currencies. Against the background of uncertainty about the final results of the elections, observers are sure that European markets will remain vulnerable in the coming days.
Risk aversion dominates, as evidenced by the spread between French and German 10-year bond yields, which rose again to 81.1 basis points on Friday, the highest since 2012 (recall that during the crisis, German government bonds are considered in Europe . a safe asset).
Disturbances of this magnitude in the French bond market are not typical for one of the richest economies of the Eurozone. Political and fiscal risks add to the volatility previously associated with highly indebted countries like Greece and Spain.
Summer sale
Ahead of snap elections, investors stepped up their sell-off of French government bonds, fearing that the rise of the far-right could undermine the country’s ability to effectively manage its national debt. Marine Le Pen’s camp, which advocates anti-immigration policies, tax cuts and lowering the pension age, is expected to significantly increase the budget deficit.
It is possible that the potential economic upheavals in France will have a ripple effect on the entire Eurozone. Last week, the German government already suspended the joint issue of government debt obligations aimed at supporting the defense system.
It said the rise of the far-right could also deter foreign investment, posing risks to Macron’s ambitious plan to pump €15 billion into technology, artificial intelligence and pharmaceuticals.
Despite the growing instability, the ECB did not consider it necessary to intervene in the situation. They reminded that the solution of any problems on the French markets is primarily within the competence of national politicians.