These sectors could represent opportunities after the French legislative elections.
The first round of the French legislative elections took place yesterday, with run-offs scheduled for Sunday 7 July. This electoral round, wanted by President Macron after the resounding electoral defeat of the European elections to go all-in (’either with me or with the extremists’) will probably revolutionize the French Assemblée Nationale.
After the first round, the Rassemblement national of Marine Le Pen and Jordan Bardella got 33.5% of the votes, a significant advantage over the center-left coalition at 28.1%, followed - only at 20.7% - by Macron’s party.
France follows a semi-presidential system, meaning that Macron will remain as President of the Republic until the next general elections in 2027. Even if the far-right manages to elect a Prime Minister, it will usher in a period of "cohabitation", where the President of the Republic and the Prime Minister come from two different parties. This means the far right would have a hard time passing legislation, and so will Macron.
However, we have known for some time that markets pay little attention to formalities such as constitutions, parliamentary regulations, and institutional practices. Therefore a large-scale victory and a possible Le Pen single-party government could have further repercussions on French government bonds and consequently on the Paris stock exchange.
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Government bonds have already been under pressure for a couple of weeks, precisely since the European elections established Le Pen as the undisputed winner. The spread between 10-year German bunds and OATs has gone from around 47 points in the pre-European situation to almost 80 basis points recorded in recent days. This led to a decline in the securities of French banks, precisely because they hold large portions of government bonds in their balance sheets. For example, Credit Agricole has lost more than 16% on the stock market in the last month, while Société Générale has fallen by more than 21 percentage points.
Investors seem much more worried about the risk of a fiscal expansion at a time when the new stability pact could put Paris and Brussels (and Frankfurt) on a collision course, than about a real risk of exit from the euro or the EU of France. Allianz and Oxford Economic have estimated that Le Pen’s policies could bring the French deficit to around 6% of GDP from a 4.3-4.8% expected with other governments. Not a huge discrepancy, but enough to bet against OAT in bank stocks.
Most likely, Le Pen would also rush to reassure the markets with prudent fiscal policies in order to stay afloat. And this could offer interesting opportunities precisely in those sectors on which the elections will weigh, therefore government bonds and the banking sector. Short-term opportunity, certainly, given that the entire European continent remains - unfortunately - on a downward trajectory: caught between impending conflicts and increasingly isolated by the growing tension between China and the United States.
Original article published on Money.it Italy 2024-06-30 11:08:45. Original title: Le opportunità sui mercati dopo le elezioni francesi
