Analysis
June 25, 2024
President Emmanuel Macron’s ruling party came third in the June 2024 European Elections. The night of the results, the French president took the unexpected step of dissolving parliament. That means France is gearing up for a new round of legislative elections, with the first round taking place on 30th June and the second on 7th July 2024. Markets are already volatile, with sell-offs in French stocks and pressure on the Euro. Traders can expect long and short opportunities in French and European markets, as this uncertain period looks set to continue.
Legislative elections select deputies for the Assemblée Nationale, the lower house of the French Parliament. These deputies are responsible for suggesting and passing legislation. A deputy from the largest party typically becomes Prime Minister, who is second only to the President in the French system. That means traders active in French stocks, forex CFD traders dealing with the Euro, and bond traders active in European or French markets, all need to prepare themselves for volatility.
Currently, a group of centrist liberal parties allied to President Macron form a minority government, relying on other right- and left-wing parties to pass key legislation. This has caused considerable friction, with the President forcing through legislation by decree on multiple occasions. The parties linked to Macron – Renaissance, MoDem, and Horizons – are all expected to perform poorly in the 2024 legislative elections.
The nationalist National Rally (RN) emphatically won the European Elections in France, and is expected to perform well in the legislatives. Historically there has been a strong taboo against working with this party and its precursor, the National Front. The RN is seen by some as falling on the extreme right and is a project of the controversial Le Pen family. That means most parties refuse to work with them in coalition, forming a cordon sanitaire, a barrier against the party.
Over the last decade, this barrier has become steadily weaker and weaker, due to very high levels of national support for the party. Their key figures are increasingly seen as normal parts of the political landscape. The centre-right Republicans (LR), one of the traditional governing parties of France, have split in two over this issue. Half of LR is following leader Eric Ciotti into a coalition with the RN, while the other half refuses to join him and will run against them.
On the left, a large grouping of left-wing parties calling itself the New Popular Front is running a unified coalition of candidates. This left-wing grouping is expected to come in second place but has also been split by infighting and concerns over left-wing extremism. In particular, one of the main NFP parties, La France Insoumise, is considered controversial. Macron’s liberal coalition is expected to come a distant third.
Strong showings by either the New Popular Front or National Rally are expected to spook markets, with neither following the pro-business line of Macron’s allies. At the moment, polling predicts an RN victory, but one that falls short of an absolute majority. That will make France very difficult to govern, and will not be welcomed by business leaders or traders. Some observers suggest the business reaction to a New Popular Front could be more severe than RN, and neither is likely to boost markets.
No one knows how markets will react to the result, or whether results will come in according to the polls. Whatever happens, France will likely end up with a President and Prime Minister who are political opponents. This is a clear negative for French stocks and the Euro. Both French government debt and stocks, especially banking stocks, are already experiencing severe sell-offs.
Just like the election result, the market reaction is far from certain. That uncertainty is already pushing French assets into risk-off territory. Traders will be looking closely for short opportunities around the election, and to see whether the risk-off sentiment spreads outside of France.
It looks like French markets are in for a sustained period of volatility. Because of the two-round structure of the French election, uncertainty is prolonged, and according to current polling, whichever party comes first will need to form a broader coalition to govern the country. Investors are perfectly placed to trade through choppy markets, thanks to the ease of taking out long or short positions, but surprise swings can stop out positions, so traders need to be wary.
The Euro Stoxx 50 index (ESTOX) takes the fifty largest shares by market capitalisation from across the diverse European stock markets. France is the second most weighted country, after Germany, so any volatility in French shares will be felt quickly here. ADSS traders might look to open short positions or trade any corrections with long CFD trades.
The CAC 40 index (FRANCE) is the benchmark index for the French economy. Significant sectors include finance, defence, and the aerospace industry. As the barometer of French market confidence, any volatility that appears during the election will be felt here first. With Macron seen as a pro-business president, an election that is near-certain to weaken his position will – probably – not be well received.
A simple but effective French election trade is the Euro / USD pair. Analysts predict that political risks around the election will have a big impact on the currency pair, the world’s most traded. Traders looking to take Euro / USD positions need to balance the political risk of the election with any economic data announced for the Eurozone or the US.
It seems likely that France is heading towards a period of political dysfunction and instability. That doesn’t necessarily impact the country’s underlying economic potential, but political disruption can scare markets and delay investment decisions. As our markets are traded as CFDs, France-focused traders who don’t mind volatility and are looking for opportunities for long and short positions, may find this two-round election promising. Remember, markets and elections don’t always do what you’d expect, so remember to keep prudent risk management practices in place at all times.