Janice R. Andrews
As investors processed the surprise outcome of the emergency election in France, which denies the left-wing party enough seats to form a government, European markets gradually rose. Losses were eliminated by the euro, while French bonds barely changed.
Following the unexpected triumph of a left-wing coalition in legislative elections, France’s CAC 40 Index (^FCHI) reversed early losses, and the benchmark Stoxx Europe 600 increased by 0.5%. The announcement that no party received the necessary majority to govern mitigated losses in the financial markets, even though France’s New Popular Front, which comprises the Socialists, won the weekend’s poll. This might limit the power of the National Rally of Marine Le Pen and the left-wing alliance, both of which support higher government expenditure.
Naturally, it was a huge surprise, but the market’s response today is somewhat muted. The far-left and the national assembly do not have a distinct majority, according to Nicolas Forest, chief investment officer of Candriam, who made this statement in a Bloomberg TV interview. It wouldn’t be very spectacular if President Emmanuel “Macron should find a new coalition between the centre and center-left.”
Investors were worried about the possibility of a far-right takeover in the lead-up to the vote following Macron’s resounding loss in last month’s European parliamentary elections. The extra yield investors want to keep French bonds compared to their German counterparts shrank to about 70 basis points, below levels observed at the peak of the market meltdown last month, suggesting that investor concerns are abating.
With 178 of the 577 seats in the lower chamber, a left-wing alliance that includes the far-left party France Unbowed will be the largest group, but it will still fall well short of the 289 needed for an absolute majority. Le Pen’s party trailed in third, with Macron’s group coming in second. As a result, Macron finds himself in a difficult situation where he must negotiate a divided parliament without a clear mandate.
Reaction of the US Market
Following Wall Street’s surge last week, US equities futures fell. This week’s key events include US inflation data and Federal Reserve Chair Jerome Powell’s congressional appearance. These are what traders will be looking at to confirm their bets that policy easing would start as early as September. Following the drop last week, the dollar stabilised and Treasury rates continued to rise.
This week also brings the release of significant US bank earnings, including JPMorgan Chase & Co. In other business news, the Justice Department determined that Boeing Co. had not complied with a previous settlement resulting from two 737 Max airliner crashes, so the planemaker consented to plead guilty to criminal conspiracy to deceive the US.
While this is going on, Democratic politicians are putting out calls for President Joe Biden to resign in an attempt to save his troubled reelection campaign. Even while respondents gave Biden harsh criticism for his debate performance, he had his best performance to date in a tracking survey of battleground states conducted by Bloomberg News and Morning Consult.
Commodities and Cryptocurrencies
Fears that creditors of the defunct Mt. Gox exchange would sell the token caused Bitcoin and other cryptocurrencies to plummet. Through the announcement of more open market operations and a tightening of the range within which short-term rates could vary, China’s central bank attempted to gain more influence over market interest rates.
Despite traders keeping an eye on the dual risks to crude production posed by a hurricane in the US and wildfires in Canada, oil prices in commodities fell after four weeks of weekly advances. While iron ore continued to fall from a one-month high, gold remained stable.
The surprising result of the emergency election in France has given European markets cause for cautious optimism. Although the possibility of market volatility has been reduced by the absence of a clear majority, investors are closely observing the implications for future fiscal policy and governance. US company earnings reports and important economic indicators continue to receive attention as the world markets respond to these political developments.
