Election-related nervousness at its peak in the markets

(Repetition without change of a dispatch transmitted on Friday)

(Reuters) – European elections are attracting almost as much attention as Euro 2024 soccer, with the first round of French parliamentary elections on Sunday expected to influence markets regardless of the outcome, while Britain could swing to a left-wing government for the first time in 14 years.

France and England, considered favourites for the Euro football championship, as well as hosts Germany, are entering the last 16 of the competition. But the excitement is not limited to the football pitches or the voting booths.

The coming days will also be marked by macroeconomic indicators, notably the monthly employment figures in the United States.

Roundup of the market outlook for the days ahead:

1/JOBS DAY IN THE USA

Investors watching for the timing of the US Federal Reserve’s (Fed) rate cuts could have new information with the publication of the official monthly report on US employment next Friday.

Economists predict an increase of 180,000 non-agricultural job creations for the month of June. In May, creations increased by 272,000, much more than expected, a sign of the resilience of the American labor market.

The Fed kept its key interest rates unchanged this month and suggested that the start of its monetary easing was being pushed back to December as bank officials await more evidence of moderating inflation and deteriorating employment.

Consumer prices in the United States unexpectedly stagnated in May, after increasing by 0.3% in April.

2/THE FRENCH AT THE URNS

France will go to the polls on Sunday, the first round of early legislative elections which shook the markets.

Before the results of the second round scheduled for July 7, investors will be attentive to the potential triangular races in the 577 constituencies. With a voting system where a candidate must collect the votes of at least 12.5% ​​of registered voters (and not votes) to qualify for the second round, the uncertainty about the final result is significant, especially in the event of a high turnout. In fact, the more registered voters vote, the greater the possibility of seeing candidates reach 12.5% ​​of the electorate.

Market fears of increased public spending have eased somewhat since officials from the far-right National Rally (RN), the party leading the polls, promised to end decades of high public deficits. However, many analysts believe that a left-wing majority, united under the banner of the New Popular Front (NFP), is riskier for financial markets.

The risk premium (“spread”) on France’s ten-year debt compared to that of Germany, an indicator closely monitored by the markets, is still more than 25 basis points above the level observed before the announcement of early elections. French banking stocks are posting double-digit losses.

3/MITIGATED RECOVERY OF M&A

Global mergers and acquisitions, in terms of volumes, saw a 20% increase in the first half of 2024 compared to 2023, while deals exceeding $5 billion jumped 53%, according to data provided by Dealogic .

Despite the recovery, trading volumes as of June 24 remain 15% below the ten-year average, partly due to a sluggish start to the second quarter, the slowest in the Asia-Pacific region since 2009.

The number of deals announced in the second quarter of 2024 is the lowest in 16 years, worse than the second quarter of 2020, when the COVID-19 pandemic shut down parts of the economy, including global M&A activity.

The outlook for the rest of the year is not very encouraging, given the upcoming elections in France, the United Kingdom and especially the United States, which will force boards of directors and private equity funds to play down their plans.

Some investment bankers are wondering whether they should instead focus on 2025, a year they hope will finally live up to their expectations.

4/HARD WORK AWAITS THE PLOUGH

Opposition Labour Party polls predict a landslide victory in the UK general election on July 4. A clear majority for Labour would benefit British stocks and government bonds, as the pound has rebounded to levels not seen since the Brexit vote in 2016.

Traders are primarily welcoming a return to stability after the political turbulence of the Conservatives’ 14-year rule. They also believe that Labour leader Keir Starmer could rebuild trade ties with Europe.

Britain, however, faces vast budgetary challenges but neither Labor nor the Conservatives have provided details on how they will be tackled, notes the Institute for Fiscal Studies think tank.

The country’s economic growth is also modest, with the public debt-to-GDP ratio at its highest level in 63 years and tax rates at their highest since 1949.

With voters expecting better public services without tax rises and investors wanting government borrowing to stabilise, Keir Starmer may struggle to please both groups.

(Written by Lewis Krauskopf in New York, Rae Wee in Singapore, Yoruk Bahceli in Amsterdam and Andres Gonzalez and Naomi Rovnick in London; compiled by Amanda Cooper; infographics by Pasit Kongkunakornkul, Prinz Matgulis; French version Claude Chendjou)