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French election worries drop CAC 40, widen bond spreads

 

Election jitters: CAC 40 falls as spreads widen between French and German bonds

The spread between French and German 10-year government bonds continued to widen on Friday, while French stocks — particularly the benchmark CAC 40 index — slumped amid concerns that the country’s parliamentary elections could result in a fragmented legislature.

After reaching its widest point since 2017 on Thursday, the spread hit 74 basis points in early trading on Friday.  

The euro also dropped below $1.07.

Chris Turner, head of currency strategy at Dutch lender ING, urged caution regarding euro exposure in the bank’s daily FX overview:

“With opinion polls taking such a toll on the euro and presumably more polls due this weekend, we expect investors will want to manage their euro exposure carefully”.

According to Turner, the euro "could well make a run” at $1.06 next week.

The French CAC 40 index fell 1.5% on Friday and has dropped 5% this week.

The moves followed French President Emmanuel Macron’s call for a snap election following his party's poor performance — and the success of the far-right Rassemblement National (RN, lit. “National Rally”) — in the European Union elections last weekend. A poll for Les Echos found Macron’s approval rating had fallen to 24% — the lowest since the Yellow Vest protests of 2018.

 

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When is the French parliamentary election?

Left-wing parties have formed an alliance to field a single candidate in each district, though agreement on a platform remains uncertain.  

The far-right National Rally is campaigning on measures such as energy tax cuts, which could further strain France’s finances.

The elections will occur in two rounds on June 30 and July 7.

 

Evercore: Hung parliament likely outcome of French election

In a comment cited by MarketWatch, analysts at Evercore, led by Krishna Guha, said:

“Macron’s gamble aimed to break the political status quo and force all non-far-right parties, including the far-left, into an alliance to stop RN. So far, he has achieved the former but not the latter.  

His party is in disarray, the left has united without it, the center-right Republicans are in crisis after its leader was expelled for suggesting an alliance with RN, and the rival far-right party has also split over the same issue.”

Evercore analysts suggest the most likely outcome is a hung parliament with RN as the largest party, but unable to form a government.

 

French election jitters hit CAC 40, bond spreads

 

Dynamics may point to “inherent fragility” of French debt

In a note on Wednesday, June 12, Markets.com Chief Market Analyst Neil Wilson wrote that the recent bond dynamics may reflect the “inherent fragility” of French debt and worries about government spending:

“Markets are not very good at pricing for extreme events that come with a low chance of happening; high-impact, low-probability (HILP) events. Pricing the extreme left tail is virtually impossible; investors just tend to cross their fingers and hope it doesn’t happen. [...]

The current one is Rassemblement National (RN) winning the European Parliament elections in France, causing chaos and the euro sliding. But is the recent move in French government bond yields really about the death of the euro? Or Frexit? I’m less certain about this – I think it may be more about the inherent fragility of French debt, fears about unfettered spending and rising deficit premia”.

Next week may bring news that the European Commission is placing France under an excessive deficit procedure, which would not only be a further embarrassment but also render the country’s bonds ineligible for purchase under the European Central Bank's transmission protection instrument.

At the time of writing on Friday, June 14, the EUR to USD pair traded at $1.0698, with the euro down 0.34% on the day. The CAC 40 index was down 2.47% at 7,516.76.


When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.  

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. 

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