CAs head analyst for the British financial company IG in Paris, Alexandre Baradez is one of the best experts on the movements, not always readable, and sometimes capricious, of the financial markets. For Point, this specialist agreed to decipher the state of mind of investors, both in equities and in French public debt, the day after the first round of the legislative elections which brought the National Rally (RN) in the lead.
Point : How are the stock markets reacting following the first round of legislative elections?
Alexandre Baradez: There was a strong easing on the Paris Stock Exchange on Monday morning, with a gain of 2.6% for the CAC 40, to 7,673 points. Since then, the index has slowed down a little, but it remains in the green, while it was in the red on Friday, at 7,479 points. The first cause of this easing is that the Stock Exchange was sold off a lot before the election because of strong fears of an absolute majority for the RN and especially for the New Popular Front (NFP), whose economic program is very scary for investors.
As these fears, even if they still exist, have not been reinforced, we are seeing a release of pressure. Of course, the risk of an absolute majority for the RN has not yet completely dissipated. But it is seen as less likely than before. At the same time, Prime Minister Gabriel Attal indicated that the much criticized unemployment insurance reform would not be implemented on 1is July as planned. This opens the door to second round negotiations so that the RN cannot obtain an absolute majority in the Assembly.
The RN has an economic program which is difficult to finance. He will have difficulty raising money from the markets, so he will have to step back.
Is the scenario of an Assembly without any party holding an absolute majority really positive?
In any case, this is the scenario that the financial markets are playing out on Monday morning, that of three large blocs that will cancel each other out in the Assembly. With the idea that no radical measure will be able to pass. This is reassuring. We could see the emergence of a technocratic government like we saw in Italy in the recent past. This is rather positive in the short term. But, in the long term, it is rather negative.
We are in the post-Covid era, in the end of “whatever it takes”, and lenders are waiting for a normalization of French public finances. With a blocked Assembly, no reform will be able to pass. And there will be little opportunity to make budgetary savings even though the financial markets are worried about France’s debt.
Is the RN perceived as an anti-business party?
Investors look at whether the measures are applicable and whether they are financed. They are apolitical. The RN gives the impression that it has converted to a realpolitik which could resemble what Giorgia Meloni did in Italy. The RN has an economic program which is difficult to finance. He will have difficulty raising money from the markets, so he will have to step back. And if he persists in wanting to tax capital, he risks hitting a wall, because investors, who always have a choice, will look elsewhere.
What does the famous ” spread »that is, the gap in government borrowing rates between France and Germany?
Friday, we were 0.85% apart, and Monday morning, we were at 0.75%. This shows a form of relief. But before the dissolution, we were at 0.5%… As a reminder, at the lowest, in the phases when the European Central Bank (ECB) had implemented the « quantitative easing »in 2015, it was 0.2%. The eurozone’s anchor zone is Germany, which is a rock. So, when a country breaks away from this anchor zone, it becomes less in demand by investors. If we take the French ten-year rate, it has gone from 3.1% to 3.35% since the dissolution. We will have to start worrying if the rate goes back up to 3.6% in the coming weeks. This would be a sign that investors are selling French debt.
The perception of the New Popular Front’s program was much more negative than that of the RN.
As part of the excessive deficit procedure, the government will have to present its public finance trajectory to Brussels at the beginning of September. Should we fear a resurgence of tensions during the budget debate at the start of the school year?
Yes, because we do not know in what framework this debate will take place. However, even if the Assembly is blocked, this debate will have to take place. That said, the market is still in anticipation. It is now that it is showing its stress, and it will continue this summer. With a calmer end of the year for the French and European markets, once we have finally passed all these budget deadlines or other and investors have visibility.
There will also be the unknown of the American presidential election. Even if everyone there is for the market, Republicans and Democrats alike. The problem is the tax cut program promised by Donald Trump. It would be very difficult to finance given the state of the United States’ public finances. And it would be very inflationary. The issue of debt will end up being immersed in the American political debate.
Can the current level of the Paris Stock Exchange be an entry point for equity investors?
The CAC 40 at 7,500 points. In my opinion, this is an entry point for investors who buy at 12 or 24 months. Before the legislative elections, we saw positive signals for growth in the eurozone. There is also the driver of the ECB’s rate cut. Finally, China seems to be doing better than a few years ago, so this is a third driver.
These macroeconomic aspects should allow the CAC 40 to move forward and return above 8,000 points by the end of the year. If the NFP had had an absolute majority, this would not have been the case. The CAC 40 would have immediately gone into the red. Without wanting to get political, the perception of the NFP program was much more negative than that of the RN. Because, at least, on the surface, the RN has changed its message a lot.
