June 10 2024: On Monday, the euro declined while French bonds and stocks suffered significant losses following President Emmanuel Macron’s unexpected call for a snap parliamentary election. This move came after a heavy defeat by the far-right in a European Union vote.
The euro dropped 0.5% to a one-month low of $1.0764 and hit a 21-month low against the sterling at 84.53 pence.
French blue-chip stocks fell by 2%, with notable declines in banks such as BNP Paribas and Societe Generale, making the CAC 40 the worst-performing index in Europe. The broader European benchmark, STOXX 600, fell by 0.7%.
French government bond prices also fell, pushing 10-year yields to nearly their highest this year at around 3.19%. Despite Centre, Liberal, and Socialist parties retaining a majority in the European Parliament elections, the significant gains by eurosceptic nationalists raised doubts about the major powers’ ability to drive policy within the bloc.
In a risky attempt to reassert his authority, Macron scheduled a parliamentary election with the first round set for June 30.
If the far-right National Rally party wins a majority, Macron could lose influence over domestic affairs.
“This development is likely bad news for markets,” commented Berenberg chief economist Holger Schmieding. “It introduces an unexpected element of uncertainty.”
With a general election in Britain on July 4 and critical U.S. elections in November, markets have recently become fragile due to fading expectations of U.S. rate cuts.
Kathleen Brooks, research director at trading platform XTB, noted that Macron’s snap election call would weigh on European markets initially, but the election results would have a more substantial impact. “Traders are concerned about how radical Marine Le Pen and Jordan Bardella might be if they succeed in the French parliamentary elections,” she said, referring to the far-right leaders.
A Wake-Up Call?
Although the euro and euro area assets have been relatively cushioned by reduced euroscepticism compared to previous elections, France’s results and Macron’s surprise decision could serve as a wake-up call.
The premium bond investors demand to hold French government debt over benchmark German bonds reached its highest in six weeks, widening by 5 basis points (bps) to 53.47 bps.
The spread between German and Italian debt, a measure of risk appetite in the broader region, also widened to 138.6 bps, the highest since late April.
“The snap election introduces a new source of uncertainty, likely impacting economic and market confidence in France,” said Jan von Gerich, chief market analyst at Nordea. However, he noted that EU election results don’t always align with domestic ones due to different voting systems and the tendency for EU elections to attract more protest votes.
French bank shares were particularly affected, with Societe Generale falling nearly 7% and BNP Paribas dropping almost 5%. Investors were concerned that higher French sovereign borrowing costs might increase banks’ funding costs amid heightened spending, according to bankers.
The cost of insuring the debt of both banks against default rose to around its highest in a month, according to data from S&P Global Market Intelligence. The European Central Bank’s recent rate cut—the first in five years—has contributed to the euro’s nearly 2.5% decline against the dollar this year, driven by differing interest rate cut outlooks between the euro area and the United States.
In France, concerns about high debt levels have intensified this year. The political uncertainty’s economic implications are now under scrutiny, especially following Standard & Poor’s recent downgrade of France’s sovereign debt rating, criticizing the government’s budget management just days before the EU election.
