Political Unrest in Europe Resurfaces After Election Results

The rightward shift in the European elections and the debacle of the parties supporting French President Emmanuel Macron has led him to call for a surprise national vote at the end of the month, bringing political risks in France back into sharp focus. This decision creates a period of significant turbulence and uncertainty regarding the outcomes of the upcoming legislative elections. The expensive and unfunded economic programs proposed by several political parties lack rationality according to commentators, as the country struggles to control its public deficits and its enormous debt could rather mean serious austerity measures, as highlighted by the recent downgrade of the country's credit rating by S&P.

Market Reactions

The EUR-USD FX rate slid more than 1% week-over-week. The CAC 40 dropped more than 6%, erasing all its gains since the beginning of the year, while the DAX lost 3%. By contrast, the yield on government bonds did not surge as some had feared. The yield on the 10-year French OAT went from 3.10% to 3.11% after reaching 3.24% on Tuesday. The yield on the 10-year Bund even plunged from 2.62% to 2.36%, thereby increasing the spread with the French OAT from 48 bps to 75 bps. This spread is considered a relevant measure of financial risk in Europe. The larger it is, the higher the risk, which also explains the decline in bank stocks.

Financial Sector Under Pressure

One of the immediate repercussions was observed in the financial sector. Prominent French banks like BNP Paribas and Société Générale saw their stocks plunge by 11.99% and 14.87% over the week, respectively. The financial sector could be the most affected by short-term political uncertainty, with notably new bank taxes suggested by certain parties, even though France is already the most heavily taxed country in the OECD.

Impact Beyond France

The effects of President Macron's dissolution of the National Assembly have not been limited to France only. The broader European market is also feeling the tremors with concerns that political instability could spread, impacting financial stability across the continent.

Economic Implications and Investor Sentiment

Investors are now forced to factor in renewed political unpredictability into their strategies. A future French government even less inclined to adhere to EU rules on deficit control is particularly troubling for markets that have grown accustomed to relative stability in the Eurozone.

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Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.