France goes to the polls, President Macron has asked Prime Minister Gabriel Attal to stay


By John

French President Emmanuel Macron has asked Prime Minister Gabriel Attal to stay “for the time being” in his place for the “stability of the country”. This was announced by the Elysée. The head of state also thanked the prime minister for the European and legislative electoral campaign he led

Analysts, meanwhile, were surprised by the French election results and do not fear a “rainbow” coalition, but rather see some risks when Bercy presents the budget law in the fall. For Filippo Diodovich, Senior Market Strategist at IG Italia, the barometer of the situation is the oat-bund spread which “is slightly down from 66 basis points at Friday’s close”. For the analyst, “before the dissolution of the National Assembly, it was slightly below 50 points, reaching 85 basis points just before the first round and now stands at 62 basis points. The little surprise of this second round, however, comes from the number of seats obtained by the NFP.which automatically raises questions about the fiscal and budgetary discussions that will take place in the Assembly». The analyst highlights that «with a public deficit above 5% of GDP last year and with the opening of the excessive deficit procedure against France (and other countries) by Brussels, the electoral result of the left bloc could raise some fears. But these fears will not necessarily have any effects, as the presidential majority (and this is also the surprise of this second round) has not collapsed and is in second place in terms of number of seats. The hypothesis of a «rainbow» coalition that goes from the moderate left to the moderate right via the center is not dead, even if the challenge will be significant and difficult». In any case, «we remain slightly positive in the short term. We believe that the biggest problems for France (and for Europe) could come in the autumn when the Assembly will have to approve the budget law».
For Kaspar Hense, BlueBay Senior Portfolio Manager, Investment Grade, RBC BlueBay, “the stock market could focus on the current political paralysis, the left’s inaction and tax increases. For spreads in the European periphery, however, the situation is not so clear-cut. The market will refocus on European defense spending, while the excessive deficit will probably be better managed by a more pro-European government.”

According to Peter Goves, Head of Developed Market Debt Sovereign Research at MFS Investment Management, a “rainbow coalition” or an “interim government” are possible. This is certainly not the most politically appealing outcome – he adds – but it is not the most unfavorable for the market either. As for the OAT-Bund spread, “we maintain our range of 70-90bps in the short term” despite the potentially politically unstable context in the medium term.
Frederic Leroux, member of the Strategic Investment Committee of Carmignac, said he was surprised not only by the election results but also by the «extent of the defeat of the Rassemblement National». What is clear, in his opinion, is the fact that the new National Assembly “does not have a majority”. “The majorities will therefore be formed on the basis of the measures to be voted on, in a context in which consensus issues will be particularly rare. The most likely scenario is that of a stalemate that prevents any significant legislative initiative. France will then manage its own daily affairs, until the next dissolution (in more than a year) or the resignation of the President of the Republic, in a context of further deterioration of the public accounts”.

On the markets, the analyst believes that the OAT/Bund spread is “set to gradually rise, increasing the cost of French debt and contributing to the weakening of the national economy”. On the equity markets, “although less than 20% of the CAC40’s profits are generated in France, it is possible that asset allocations to France will be permanently reduced”. The news of the dissolution of the French National Assembly “had caused a uniform decline in all French stocks, showing an indiscriminate reduction in the allocation to France. Now that the apparent ‘worst-case scenario’ of the market has been averted, the best export companies should return to outperform the French equity market, which will suffer from a clear and lasting lack of domestic dynamism. The French situation also seems set to contribute to the weakening of the euro, given the stalling of the Franco-German political engine”.