Forget the UK General Election.
The poll that financial markets will be watching most closely in the coming days is the second round of the parliamentary “run-off” in France this Sunday.
French opinion polls are unpredictable to say the least.
The first round of voting raised the prospect of a hung parliament last week and prompted a supportive rally in French assets on Monday this week.
Markets would prefer a hung parliament as Marine Le Pen’s far-right Rassemblement National (RN or National Rally) and the New People’s Front (NPF) – an alliance of far-left France Unbowed, Greens and Socialists – want to raise taxes and public spending aggressively.
But uncertainty remains in the air as the FNM and the French president Emmanuel MacronThe centrist alliance Ensemble (Together) is trying to prevent the triumph of the RN.
What’s next in the French vote?
Under French electoral rules, where no candidate won in the first round, a runoff “runoff” is between the two best-placed candidates and all other candidates who won more than 12.5% ​​of the vote in the first round. bike. Whoever gets the most votes in the second round wins.
Accordingly, both the FNM and Ensemble fielded most candidates in seats where they finished third last time – in the hope that their supporters would tactically vote to stay out of the RN.
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Le Monde, France’s second best-selling newspaper, reported yesterday that 224 candidates had withdrawn.
Tactical questions
However, the tactic may not work, not least because of the conservative Les Republicains – the party of former presidents Jacques Chirac and Nicolas Sarkozy and which won 10.2% of the vote last Sunday – has provided no such thing to its supporters and could split the anti-RN vote.
In addition, many liberal and conservative voters will be reluctant to vote for an FNM candidate when they come from France Unbowed, led by 72-year-old leftist fanatic Jean-Luc Melenchon, who is often characterized as the French version. of Jeremy Corbyn and who put the alliance together.
Edouard Philippe, Macron’s former prime minister, called on Ensemble candidates to step down from where they were in third place in the first round and get behind centre-right or centre-left candidates – but not candidates from the RN or France Unbowed.
Nervous watch
Le Monde estimates that of the remaining competitions, around 409 will now be decided by a two-sided duel. There are 89 three-way contests and two four-way battles.
With the RN expected to win somewhere between 250 and 300 seats in the National Assembly – 289 are required for a majority and it came out on top in the first round with 296 seats – this has sparked nervous watch markets.
Since Mr. Macron stunned Europe on June 10 calling of parliamentary electionsAfter Ensemble suffered a beating in the European Parliament elections, investors were rattled by the prospect of either the RN or the FNM winning a parliamentary majority.
Market reaction so far
The CAC-40, France’s leading stock index, fell more than 6.5% between June 10 and last Friday – the last day before the first round of voting.
But some individual stocks fell more, with banks Société Générale and Credit Agricole down 10% and 7% respectively since Mr Macron’s election announcement. Construction and telecommunications conglomerate Bouygues also fell 10% and Vinci, the construction and infrastructure services group that owns British civil engineer Taylor Woodrow, fell more than 7.5%.
There has also been a sell-off in French government bonds – reflecting fears that a high-spending RN or FNM government will increase borrowing.
The yield (bond yields rise as the price falls) on 10-year French government bonds jumped from 3.118% the day before Macron called the election to as high as 3.373% on Tuesday this week.
And the premium that investors demand to hold 10-year French government bonds over their German equivalent rose to 85.2 basis points (0.852%) from 47.61 basis points (0.4761%) before Macron called the election last Friday ) – a sharp and significant move highlighting investor concerns and widening the spread to the largest in 12 years.
A French-style mini-budget moment?
This has led some investment analysts to speculate that France could be suffering its own mini-budget moment – ​​when bond investors sell the national debt out of fear that excess borrowing would spiral out of control.
Uncertainty has even spilled over into the euro, which fell from $1.09 just before the European Parliament election to as low as $1.067 in the days after Mr Macron called the snap poll, although it has since risen to around $1.079.
Some analysts now say French assets represent good value, assuming the second round of voting results in a hung parliament or a modest majority for the RN, seen as a more market-friendly outcome than an FNM victory.
Marina Zavolock and Regiane Yamanari, strategists at Morgan Stanley, told clients today: “We believe the two key remaining French election scenarios – no majority and RN absolute majority – would ultimately both be followed by a recovery in French and broader European equity indices. “
Pre-existing concerns
But there are still widespread concerns — and so serious that the European Central Bank even faced questions at its annual central banking forum in Sintra, Portugal this week, about whether it would be prepared to intervene in markets if necessary. support French government bonds.
France is already in the so-called “excessive deficit procedure” with the European Commission to achieve a budget deficit of 5% of GDP – well ahead of the 3% limit set by the Maastricht Treaty. This already meant a potential collision course with Brussels in the event of a RN or FNM victory.
Some freedom because it’s France
France has traditionally had some freedom Brussels over ongoing excessive deficits because of its importance to the eurozone – where it is the second largest economy behind Germany.
This position was summed up perfectly Jean-Claude Junckerthe former commission president, when asked in 2016 why France was not forced to play by the same rules as, say, Greece or Portugal: “Because it’s France.”
But Reuters reported today that some ECB governors are expected to insist the central bank should not intervene until Paris reaches some agreement with the Commission on its deficit.
However, during the panel discussion, ECB President Christine Lagarde hinted that the ECB could intervene, particularly if the sell-off of French government debt spread the contagion to other eurozone debt – only like her predecessor Mario Draghi in 2012.
Ms Lagarde said: “The European Central Bank has to do what it has to do. Our mandate is price stability. Of course price stability depends on financial stability and we pay attention to that.”
So the markets were announced.
But the bigger picture is that bond investors will continue to be concerned about France’s deficit regardless of the outcome on Sunday.