The surprise decision by French president Emmanuel Macron to call a snap general election has triggered higher sovereign yields and exposed weaknesses in the equity market, according to analysts at Lombard Odier.
The most likely outcome from Macron’s electoral gamble would be a hung parliament, predicted Dr Nannette Hechler-Fayd’herbe, head of investment strategy, sustainability and research at the firm, and senior macro strategist Bill Papadakis. This, they posit, would lead to moderately higher uncertainty but little policy change.
After a disastrous showing in the European elections, in which Marine Le Pen’s Rassemblement National political party attracted double the number of votes of Macron’s Renaissance party, the embattled French head of state called a snap election, the two rounds of which will take place on 30 June and 7 July.
“Markets reacted immediately, pushing 10-year French sovereign bond (‘Obligations assimilables du Trésor’ or OAT) yields from less than 3% to just above 3.30% (and widening the spread versus German Bunds to 78 basis points),” noted Lombard Odier. “France’s CAC40 index is 9% lower over the month and barely flat year to date, while Germany’s DAX declined 4% over the month, although it remains 7% higher than at the beginning of this year.”
‘Deep political shifts’
“Deep political shifts” at the national level were now a real possibility in core EU member states, warned Hechler-Fayd’herbe and Papadakis – including France. Of all the likely outcomes in the upcoming election, the pair suggested, the most probable was a hung parliament, allowing Macron to remain as president but seriously weakening his position with no party having an overall majority.
“If the French election results in a ‘cohabitation’ with a hung parliament, our base case economic outlook for the eurozone remains on track,” they concluded. “That should see French equities recover after the second round of the elections, offering a potential entry point for investors.”
“On the other hand, if a new parliament emerges with a governing majority, we expect a more uncertain economic outlook for the eurozone. This would create the greatest risks for other European assets such as eurozone sovereign bonds and the euro. We would expect French equities to continue selling off, especially in the case of a left-wing majority French government.”
