Calm before the storm? On the eve of the first round of voting in the legislative elections, the markets remain on the defensive. The flagship index of the Paris market, the CAC 40, is in decline on European stock markets which are rather in the green. Since the announcement of the dissolution on June 9, the Parisian index has lost 7% while the Stoxx Europe index has lost less than 1%.
The market reaction was therefore ultimately focused on French stocks, and more precisely, on sectors deemed more sensitive to domestic or sovereign risk, such as banks or collective services or non-discretionary consumption. On the rates market, the risk premium (difference between the French sovereign rate and the German sovereign rate) has widened significantly to around 80 basis points, compared to around 50 basis points before the dissolution.
Cheap price paid
Ce « spread “The Franco-German ratio has even reached a high since 2012… while remaining very far from that reached at the height of the euro crisis (200 basis points). “It’s not expensive to pay”, comments a bond manager, who expected worse in the face of the political chaos to which France (and investors in France) are little accustomed. According to this manager, “ foreign investors reacted late and it was French investors who caused the volatility.”
For twenty days, brokers, managers, strategists and market economists have been testing themselves against political scenarios. Without really believing it. However, the scenario that holds the string is that of a next national assembly without a real majority, nor possibility of coalition, with an impossibility of voting a budget for 2025. The Constitution provides in this case for a postponement, month after month, of the 2024 budget already voted on, thus avoiding a situation of “ shut down ” American style.
This will obviously be a weak point for the French signature and we should not expect the risk premium to return to its pre-dissolution level. The only positive point is that the cost of French debt has only increased by a few points and that French “corporate” issuers continue to place paper without problem on the market.
Foreign investors, guns at the ready
Foreign investors are still in the “wait and see“. “They clearly have the Italian example in mind”, indicates a bond manager. The arrival of the far-right politician Giorgia Meloni to power had created stress, quickly dissipated by the implementation of an orthodox economic policy, embodied by a minister of the economy, Giancarlo Giorgetti, dubbed by Mario Draghi , former president of the ECB and former chairman of the council. The National Rally (RN, far right) in France is also looking for its “Mario Draghi”. And Italy is seen as a good student of Europe!
“The influence of the European framework on the implementation of economic policy is the best safeguard. Because access to European resources is conditional on the proper execution of investment programs and compliance with European commitments.”, recalls Franck Dixmier, director of bond management at Allianz GI. This is all the more true as France must enter into an excessive deficit procedure in September. Engaging France in an open confrontation with the European authorities would, however, have a major impact on France’s image and its ability to attract capital, not to mention an increase in the cost of refinancing the State.
Take advantage of opportunities
On credit, it is resilience that dominates. “There is no panic, or sell-off. The mindset of investors is rather to take advantage of more interesting entry points on the credit market”notes Vincent Marioni, director of credit investments at Allianz GI.
On stocks, the return of volatility is also giving managers a cold sweat. But without panic. Many so-called heritage funds are even ready to return to equities to take advantage of recent declines, particularly on values which are the most international, but sometimes perceived as “domestic”.
The collective services group Veolia, which lost more than 10%, reminds analysts of the international dimension of the group. And even the most severely sanctioned French banks, such as BNP Paribas or Société Générale, are those which are ultimately the least exposed to French sovereign risk, unlike mutual societies or a Postal Bank.
What could worry the markets more is the deterioration of leading indicators in the Eurozone or a slowdown in the United States that is expected to be stronger than anticipated by the markets. This could then prompt the ECB and the Federal Reserve to take the path of two rate cuts this year.
