In just 12 days, France will hold early elections. The initial reaction of European markets to the announcement was highly negative. Shares of many French companies fell, and the situation in France has also impacted us through the weakening of the Polish złoty. Although the situation has now calmed down somewhat, markets are eagerly awaiting the outcome.
Eight days ago, in response to the results of the European Parliament elections, Emmanuel Macron decided to call early parliamentary elections. The first round will take place in just 12 days, on June 30th. This unexpected decision has also affected financial markets. Since the announcement, the STOXX600 index of the 600 largest European companies has dropped by 2%, and the French CAC40 has lost as much as 4%. The euro has weakened as well, with the EUR/USD exchange rate dropping from 1.09 to 1.07. The złoty has also depreciated, with its exchange rate falling from 4.31 to 4.35 per euro.
President Macron’s decision has introduced additional uncertainty into the market, which investors did not anticipate. Previously, they were more focused on the upcoming elections in the UK, the USA, and other countries. This year, elections are scheduled in countries collectively accounting for 60% of global GDP.
Investors are genuinely concerned about the possibility of Marine Le Pen’s party winning, as she might seek to nationalize certain French enterprises post-election. Shares of highway operators Vinci and Eiffage fell by over 15% at the beginning of last week. Major declines also hit French banks such as Société Générale, BNP Paribas, and Crédit Agricole. The stocks of two media conglomerates, TF1 and M6, also dropped, due to Le Pen’s earlier statements about privatizing public media, which would negatively impact these companies. Energy companies’ shares fell as well, due to her proposed price control measures on electricity (a policy currently implemented in Poland).
The increased level of uncertainty is also evident in the government bond market. The spread between the yields on 10-year French and German bonds (considered the safest and lowest-yielding) rose above 0.8 percentage points for the first time since the debt crisis of 2011. At the end of May, before S&P Global Ratings’ decision to downgrade France’s long-term debt rating from AA to AA-, it was slightly above 0.5 percentage points. Markets will closely monitor whether these issues spill over into other highly indebted EU countries like Italy and Spain. Investors will also watch the European Central Bank’s response to the situation. Conversely, American bonds are benefiting from the troubles of European bonds, with their yields falling.
Markets are awaiting the first round of elections, set to take place in just 12 days. The elections to the National Assembly in France will be held in single-member constituencies. The winner in the first round on June 30th will be the candidate who receives the most votes and surpasses the threshold of 25% of registered voters. If this does not happen in a constituency, a second round will be held a week later, featuring the two candidates with the highest results from the first round, plus any other candidates who exceeded the threshold of 12.5% of registered voters. In the second round, the candidate with the most votes wins the mandate. According to the latest polls, the National Rally can count on 33% of the vote, the Socialists running as the “New People’s Front” on 28%, and President Macron’s coalition on 18%.
Paweł Majtkowski, eToro Market Analyst
