where is the CAC 40 going, as the second round of the legislative elections approaches?

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– Paris Stock Exchange (Palais Brongniart)

The Paris Stock Exchange and other European stock markets are entering a week with high stakes, with the new composition of the next French and British governments in sight, warns Bank of New York. The CAC 40 attempted to stabilize this Monday, after several trying weeks following the dissolution of the National Assembly by Emmanuel Macron. It must be said that the outcome of the first round of the legislative elections yesterday rather reassured the financial community. In particular, the scenario considered the least favorable for the Stock Exchange, that of an absolute majority of the New Popular Front (NFP), is almost ruled out, judges LBP AM, the asset manager of La Banque Postale.

Indeed, while the New Popular Front’s very costly economic program is a scarecrow in the eyes of stock investors (with the prospect of a surge in tax rates and a probable jump in France’s long-term rates, which would have greatly increased stress on the Paris Stock Exchange), the scores achieved by this important political party make it unlikely that it will come to power. The NFP’s share of votes, although significant, is not massive and does not constitute a majority, Franklin Templeton points out in this regard.

The scenario of an absolute majority of the RN becomes less probable, the CAC 40 appreciates

In addition, the National Rally (RN) – whose program is preferred (by the financial community) to that of the New Popular Front but is still considered less favorable than that of the presidential camp – achieved a historic score but nevertheless not as much as the latest polls suggested. As a result, the shares of listed companies a priori most exposed in the event of the RN coming to power jumped this morning, like banks (BNP Paribas, Société Générale and Crédit Agricole), giants of community services (Veolia, Engie) and media (TF1, Métropole Télévision – M6)…

While the second round of the legislative elections will be held next Sunday (June 7), the specter of an absolute majority for the National Rally is not at zero risk of arising at this stage, but the first statements from the different camps on possible withdrawals and therefore the opening of negotiations in view of the upcoming election will make the scenario of an absolute majority for the RN more difficult to materialize, argues Alexandre Baradez, columnist for Capital and head of market research at IG France. For the expert, these negotiations should a priori “smooth it out” of the most radical campaign proposals (those that scare the stock market the most) of certain political parties. The renewed optimism seen on the CAC 40 this morning is therefore understandable.

In the second round on July 7, obtaining an absolute majority by the National Rally seems improbable, adds Franklin Templeton, for whom we must therefore expect for France a probable Parliament without a majority and a “lasting political malaise in the near future“. As France’s public finances are adrift, the government will be forced to control the trajectory of the budget deficit. This forced priority will pose a major challenge for the future administration. However, working to improve the financial situation of France without a parliamentary majority will be significantly difficult, argues Franklin Templeton, who adds that both the right and the left have massive spending programs, in total contradiction with the objective of reducing the public deficit! If the RN has said it wants to respect the budgetary rules of the European Union, seeking to reduce the public deficit and succeeding in doing so are not at all the same thing and investors are right to remain cautious, judges the American giant of the asset management.

After the air pocket on the CAC 40, there are “opportunities on French stocks»

In all the scenarios developed by Franklin Templeton, France should not deviate from its budgetary constraints vis-à-vis the EU. Hence the idea that market fears about the risk of implementing unorthodox budgetary policies (with costly measures and a notable widening of the public deficit) “are exaggerated“, in the eyes of the asset manager, for whom these concerns offer “opportunities on French stocks“, after the sharp fall in the prices of listed companies in certain sectors of activity. The shares of the sectors of activity which have suffered the most on the stock market in recent weeks, namely “banks, utilities and infrastructure» – considered the most vulnerable in the event of a widening of the 10-year rate gap between France and Germany (a gauge of the perceived risk on the financial situation of France) – will be first more inclined to go back up, judge Franklin Templeton.

Warning, long-term rates and the Paris Stock Exchange are likely to remain volatile

Be careful, however. We can reasonably fear in the short term but also for the coming months and quarters a “continued volatility» of the prices of French government bonds (and therefore of France’s long-term rates, which should also favor possible blows on French equities), against a backdrop of probable “persistent political instability», Warns Franklin Templeton, who also expects that the 10-year rate differential between France and Germany will not return to the level which prevailed before the dissolution of the National Assembly. And this, whatever the outcome of the second round of the legislative elections, which highlight “the political risks to fear ahead of the 2027 presidential election».

What does technical analysis say about the outlook for the CAC 40?

From a technical analysis perspective, Momentum, Capital’s daily premium investment newsletter on the stock market, still sees reasons to remain cautious about the trajectory of the CAC 40 (whose dip in recent weeks was largely expected by our team of analysts). Discover in Momentum every day our scenarios and analyses on the CAC 40 and our expectations on stocks on the stock market. And take advantage of a 30% reduction on the price of our annual subscription on the occasion of the summer sales. To take advantage of it, simply click on the link inserted above in this article. Furthermore, after the great success of my book Chartist figures of technical analysisdiscover my latest book Technical analysis in 50 practical casestwo books which allow you to invest in the stock market (and in cryptocurrencies) with a good timing and which are among the best sellers of their category.