French stocks and the euro fell this week after President Emmanuel Macron’s unexpected decision to call early elections, leading to political uncertainty and fears of a right-wing-dominated parliament, according to Reuters.
The reason for the market turmoil is the advance of the National Rally party led by Eurosceptic Marine Le Pen in opinion polls and the new alliance formed by the leftist parties in France.
Market reaction: Significant declines
Reuters reported that French stocks received a strong blow, as the CAC 40 index of leading stocks witnessed a 6% decline this week, recording its largest weekly decline in more than two years.
“We are in a shoot-first, ask-questions later situation with respect to France,” Tom O’Hara, portfolio manager at Janus Henderson Investors, told the agency. Shares of medium-sized companies, which are most exposed to the national economy, fell by 9%, the largest decline since March 2020 during the pandemic turmoil.
Reuters said that banks were particularly affected, as BNP Paribas, Credit Agricole and Société Générale all saw declines of more than 10% this week. The combined market value loss of these banks amounts to about $19 billion, based on data reported by Reuters from LSEG Research.
Bond market and borrowing costs
French government bonds are also under significant pressure. The yield spread between French and German 10-year bonds rose to 78 basis points, the highest since 2017, and approaching levels not seen since the euro zone crisis in 2012.
Analysts at UBS note that wider spreads could provide a “tactical buying opportunity”, but expect investors to adopt a cautious approach until there is more clarity on electoral alliances and fiscal policies.
It is worth noting that borrowing money for 10 years now costs the French government more than the Portuguese government, a situation that has not been seen since at least 2005, according to the agency.
Currency market fluctuations
The euro fell about 1% against the dollar, pound and Swiss franc this week, reaching its lowest level against the pound in nearly two years.
“It will be a long month for the euro,” Chris Turner, head of global markets at ING, told Reuters.
Volatility of one-month euro options against both the dollar and the British pound rose to its highest level in more than a year. Turner expects the euro to fall towards $1.06 next week, its lowest level since last November. Its price currently stands at $1.0685.
High credit default swaps
Reuters confirmed that the costs of insuring France’s debts against default had risen to the sky. France’s 5-year credit default swap widened to 36 basis points on Friday, up from 24 basis points the previous week.
These levels are the highest since the pandemic and before that, since the 2017 presidential elections when markets feared the possibility of Le Pen being elected president.
