French politics: 📢 Absolute shock result for the legislative elections 📢
The left-wing New Popular Front (NFP) is set to come in FIRST, and Marine Le Pen’s far-right National Rally in THIRD in absolute shock result for the French legislative elections. Within NFP, radical left LFI leader J.L Melenchon wants the current Prime Minister to leave and rules out any coalition with the centrists (i.e he claims the Prime Minister seat for him or someone else from LFI) We note that within NFP (left-wing), the socialist party PS and the Greens have a strong score relative to radical left LFI. As such, it is unlikely that LFI will be able to claim the Prime Minister seat. Three scenarios: 1/ NFP government (with a Prime Minister coming from the less radical arm of NFP); 2/ A center-left coalition government (Macron’s Ensemble + less radical left + green).; 3/ If no political solution is found, a caretaker government could be appointed, OR instead a so-called technocratic government led by a non-political prime minister. All-in, the result is rather negative for markets (equities and bonds) as the radical left & left NFP party program is somewhat of a flash-back into the old French socialist program: - Retirement age at 60-year old - Increase of the minimum salary - Increase of taxes Such a political program would obviously be both inflationary and increase debt load and budget deficit. Still, it remains unlikely that left & radical left would be able to impose this program as their majority is a relative one. All in all, we do expect some sell-off of French equities and a rise of the OAT-Bund spread tomorrow. With regards to the new PM and the economic & social program to be applied, next few days will be critical (unless they postpone any decision after the Olympic Games...).
French stocks are more than 4% away from reclaiming the losses they have suffered since the election was called last month.
Meanwhile, French bonds already have been lifted by the political maneuvering that seeks to block Marine Le Pen’s National Rally from winning an absolute majority in the National Assembly. The Franco-German 10yr spread has came down by -5bps to 67bps and has been tightening for 5 .consecutive day. This takes the spread down its tightest level in three weeks. Emmanuel Macron’s centrist group and a left-wing alliance opposed to Le Pen strategically pulled 223 candidates out of constituencies in an effort to avoid splitting opposition to the far right and lessen its chances of winning enough seats to form a government. That means no party is likely to win the 289 seats needed for a majority, the Morgan Stanley team said. Source: David Simon Elkoubi, Morgan Stanley
France's 10y risk spread over German bunds drops to 74bps on speculation Marine Le Pen’s far-right party will struggle to win an outright majority in French elections.
Source: HolgerZ, Bloomberg
The Le Pen vote
Parliament elections 1st Round- over time: 1988: 9% 1993: 12% 1997: 15% 2002: 11% 2007: 4% 2012: 13% 2017: 13% 2022: 18% 2024: 34% National populism is only getting stronger. Source: Matt Goodwin
A maps of 2024 French legislative election 1st round
next round is 7th of July Source: FT
Euro starts slightly higher to the week following French election in which Marine Le Pen’s far-right party is poised to dominate the first round.
Source: Bloomberg, HolgerZ
FRENCH LOWER HOUSE SNAP ELECTIONS
FIRST TAKE 1) French far-right has strong lead in France's 1st voting round. The National Rally (RN) was projected to get between 33% and 34.2% of the vote. The left-wing New Popular Front coalition was set to get between 28.5% and 29.6% and Macron’s centrist alliance between 21.5% and 22.4%. 2) The exit polls were in line with opinion polls ahead of the election, but provided little clarity on whether the RN will be able to form a government to "cohabit" with the pro-EU Macron after next Sunday's run-off. As projections show between 240 to 270 seats won at the second round, the RN could thus get a relative majority in Parliament. Le Pen party needs 289 seats for a majority in the second round French ballot. Bottom-line >>> The National Rally is likely to win the elections. Question is would it be a RELATIVE or ABSOLUTE majority. There are 3 possible outcomes: 1/ Absolute majority (Bardella as Prime Minister) Expect modest OAT-Bund spread widening and another (modest) downside leg for French equities (especially “national victims”) 2/ Minority majority / Hung parliament Expect a modest OAT-Bund spread widening and French equities stabilize 3/ Caretaker or Technical government Expect a modest OAT-Bund spread tightening and French equities rebound (especially “national victims”). The euro is currently STRENGTHENING as Asia trading just started. This means that markets are now expecting a HUNG PARLIAMENT with no Prime Minister coming from Rassemblement National. Even of the party from Mrs Le Pen win the election, they will refuse to appoint Bardella as PM. This opens the door to a Prime Minster coming from the center or a technical one. This means political paralysis but markets can probably live with this...
Mind the gap: The French debt ratio is almost twice as high as the German debt ratio.
Source: HolgerZ, Bloomberg
