CAC 40: Paris Stock Exchange opens down after second round of legislative elections

CAC 40: Paris Stock Exchange opens down after second round of legislative elections
CAC 40: Paris Stock Exchange opens down after second round of legislative elections

(BFM Bourse) – The CAC 40 started down on Monday following the second round of legislative elections. While the scenario hoped for by the market, that of a National Assembly without an absolute majority, has come true, uncertainty remains high.

The market is now in a state of expectation. Following the second round of the legislative elections, the Paris Stock Exchange fell early this Monday morning. The CAC 40 fell 0.56% to 7,632.08 points, shortly after the Paris market opened.

On the debt market, there is no major tension to report. The gap between the yield on the 10-year French bond and that of the same maturity in Germany, a gauge of stress on French debt, has widened by two points (0.02 percentage points). This gap stands at 68 basis points, whereas it had exceeded 84 basis points in the weeks following the dissolution of the National Assembly.

On Sunday, the New Popular Front (NFP), a coalition of left-wing parties, came out on top in the second round, defying predictions. The left-wing bloc emerged with more than 180 deputies, ahead of the coalition of the in-person majority Ensemble (more than 160 elected members) and the National Rally (more than 140).

However, no bloc obtained an absolute majority of 289 deputies. As a result, many scenarios are possible in the aftermath of these elections. The leader of La France Insoumise, Jean-Luc Mélenchon, raised the possibility of the NFP governing without a majority, with certain measures that could be taken quickly by decree.

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Fears over the deficit

“Overall, with the three groups (NFP, RN and Ensemble) far from a majority, investors can consider that the results have avoided the worst possible consequences. But there is a risk that the hard-left candidate Jean-Luc Mélenchon will be appointed Prime Minister. And even if he is not, the parliamentary impasse will hamper efforts to sustainably clean up public finances,” judges Capital Economics.

“The NFP has the most aggressive fiscal agenda, both in terms of spending and taxes, and the market will be wary of the prospect of seeing them in government now or later, leading to higher deficits, with the attendant concerns about debt sustainability and strained relations with Europe,” Deutsche Bank strategists note.

“While the financial markets should initially be relieved that the extremes did not obtain an absolute majority in the National Assembly, it is highly likely that volatility will rise a notch in a second phase,” considers John Plassard, investment advisor at Mirabaud.

“Indeed, an Assembly divided into several blocs without any of them holding a clear majority makes it difficult to form a government and take important decisions. No major reform should see the light of day in the next 3 years, which means that the rating agencies (Moody’s in the lead) will quickly revise downwards their estimates for France…”, he explains.

Let us recall that the Paris index had lost around 6.5% between the announcement of the dissolution of the National Assembly by Emmanuel Macron and the Friday preceding the first round of the legislative elections. The CAC 40 then significantly reduced its losses in the inter-round period, returning on Friday evening to around 4% of its pre-dissolution level.

Julien Marion – ©2024 BFM Bourse

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