As the French parliamentary elections approach, European financial markets brace for potential turbulence. The first round is set for this Sunday, with the final round on July 7. Recent polls indicate Marine Le Pen’s National Rally (RN) leads with 35.4% of preferences, followed by the far-left New Popular Front (NFP) at 28.1%, and President Emmanuel Macron’s Renaissance at 20.8%. This suggests a possible contest between far-right and far-left coalitions, sidelining Macron’s centrist parties.
Sonia Renoult, a rates strategist at ABN AMRO, warns of potential fiscal instability under a new government. She highlights that France’s fiscal deficit is unlikely to return to the 3% target by 2027. Both RN and NFP propose expansionary fiscal policies, which could lead to unsustainable debt levels. An RN-led government could result in persistent deficits above 6%, while an NFP-led government could push the deficit closer to 8%.
Financial markets are concerned about the impact of these policies. French bonds have underperformed since the election announcement, with the OAT-Bund spread expected to remain wide until the election outcome is clear. The 10-year bond yield now trades above its Belgian counterpart and aligns with lower-rated peripheral countries like Portugal.
Renoult suggests that political uncertainties may present investment opportunities. Once resolved, investors could find favorable yields in countries with strong economic fundamentals, such as Spain or Portugal.
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