Plague or flu, France’s elections may infect global investments

between yields on French and German government bonds have widened and the euro has weakened. 

In short, investors fear new political relations that do not augur well for the European economy and unity. Is this fear exaggerated?

Macron seems to be betting that the elections will eventually be characterized by the Chaucerian proverb "While two dogs are fighting for a bone, a third runs away with it." 

He hopes that the recently formed left-wing alliance, Nouveau Front Populaire, and the bloc around the National Rally will soon be torn apart internally and shunned by French voters so that Macron and his party, Renaissance, can continue to call the shots along with a few centrist parties. 

A French executive recently told the Financial Times that the choice between the Nouveau Front Populaire and the National Rally is similar to choosing between the plague or cholera.

Macron's decision to have voters cast their ballots ahead of schedule was informed by the events of 2022, among other factors. At the time, the left also formed a joint bloc to make life difficult for Macron. Before too long, however, the participants in this alliance were more at odds with each other than Macron.

Another factor for Macron may have been that if the National Rally wins, they will have to show that they can handle governmental responsibility. In Macron’s view, they will likely fail miserably — causing Marie Le Pen and associates to be written off for the 2027 presidential election.

At any rate, French industry is already hedging its bets: Top executives of major companies are trying to get into the National Rally's good graces to determine and adjust the party's still rather vague economic agenda.

But what is the likelihood of one of the left-wing or right-wing blocs achieving an absolute majority, thus being able to call the shots? 

The National Rally is leading in the polls, but 289 seats must be secured for an absolute majority; the party currently has 88. Even if Renaissance loses half of its current seats and the right-wing, formerly big Les Republicains, lose all their seats to the National Rally, the Le Pen/Bardella duo will still be 70 seats short.

Also, when trying to predict results for the National Rally, two factors that raise uncertainty must be considered:

·  Voters may have expressed their discontent via the relatively less consequential European elections, thereby giving a middle finger to Macron, but they may make a more moderate choice in the national elections.

·  In 2022, the polls gave the National Rally 20-30 seats; it ultimately secured three times as many seats. So, voters may have been reluctant at the time to openly admit that they would vote for the controversial bloc, but once in the anonymous voting booth, they still ticked the box for Le Pen's party. This could happen again now, although Le Pen has greatly moderated her tone and her party has become far more acceptable in the eyes of many.

This brings us to the Nouveau Front Populaire: a left-wing alliance and hodgepodge of Socialists, Communists, Greens, Jean-Luc Mélenchon's radical left La France Insoumise and a few more parties. 

Right away, there was controversy over a possible premiership for Mélenchon, forcing him to declare that someone else would become prime minister should the leftist bloc emerge victorious. I suspect that the left-wing alliance will lose to the National Rally and come under internal pressure before too long; the participating parties simply have too many differences of opinion.

Ensemble – the centrist alliance of Macron's Renaissance and two other parties - will not win the elections, but it can ensure that the winning alliance remains far from an absolute majority. One way in which Renaissance tries to do this is by not presenting a candidate of its own in over 10 percent of the 577 districts to increase the chances of moderate allies.

Bear in mind that if no candidate gets more than 50 percent of the vote in a district in the first round, the election will be held over two rounds. This is an entirely different system from that of the European elections. In 2017, it ensured that Macron's party, which had only 32 percent of the vote in the first round, ultimately secured 61 percent of parliamentary seats. 

Given the above, the two most likely scenarios are a National Rally victory with Le Pen/Bardella remaining some distance from an absolute majority or a result without a very clear winner, as in 2022.

Given the great uncertainty, French stock markets will continue to see wait-and-see attitudes from investors in coming weeks, as will investors in French government bonds. 

Incidentally, the plunge of French shares following the European elections and Macron's electoral move was striking because shares in France’s CAC40 stock market index and those in the MSCI France index are only about 15 percent dependent on the French market. Indeed, the loss was largely due to French entities owning vast amounts of the nation’s government debt securities.

As for French government bonds, it is important to note that a relatively large proportion (52 percent) is held by foreign investors, who will dispose of French government bonds more easily than French investors with continuing political instability.

After July 7, a relief party wouldn’t come as a surprise if it turns out that the National Rally is less able to make its mark on French economic and foreign policy than feared, or if the Ensemble coalition surprises with a better-than-expected result. In this case, the spread between 10-year German and French bond yields will likely fall back, French shares (and other European stock markets) will pick up and the euro may strengthen somewhat.

If the National Rally does achieve a major victory, we will likely see the opposite, with a limited plunge for French shares (limited because some of its proposals are business-friendly) and other European stock indices, as there may be renewed doubts about the euro's sustainability. Furthermore, the spread between French and German bond yields will likely widen further. The euro will then undoubtedly lose some more ground. 

These movements will be partially reversed if it turns out that the scenario with a National Rally victory is not as bad as it seems 

I consider a mixed result — just as in 2022 — to be slightly more likely than a clear victory for the National Rally. An absolute majority for the Le Pen/Bardella duo is unlikely. 

So it’s neither cholera nor plague for France, but a serious flu is a distinct possibility.  

Andy Langenkamp is a strategic analyst at ECR Research and ICC Consultants.