Sunday is the first day of France’s parliamentary election. The country has the second-largest economy in the eurozone and is likely to end up with a legislative deadlock.
Those who make it to the second round on July 7 will have already been through the first round. In theory, candidates can win in just one round if they get the support of more than 25% of registered voters and an absolute majority. However, that only happened in five of the 577 seats that were up for election last time.
If that doesn’t happen, the top two candidates and any other candidate who got more than 12.5% of registered voters will move on to the next round. Analysts think that there will be more races with three candidates than usual because more people are expected to vote.
The polls will be open from 8 p.m. local time, which is 2 p.m. Eastern Time in the United States.
Polls show that the National Rally, which is very far to the right, is likely to win the most seats, but not a majority of 289 seats. Second place would go to the far-left New Popular Front, and third would go to President Emmanuel Macron’s Ensemble coalition, which is more moderate.
The legislative stalemate likely to ensue comes after the European Union was instructed to begin what’s called an excessive deficit procedure against France and six other countries.
That has made French bonds less stable, especially when compared to German ones. The difference in yields between France’s BX:TMBMKFR-10Y and Germany’s BX:TMBMKDE-10Y 10-year bonds was 78 basis points on Friday.
If a French government with a majority of votes rejects the Stability and Growth Pact, UBS economists led by Felix Huefner said, “We would expect 10y France vs Germany spreads to test a level of around 130 bps.” “This is about where Italy traded before the European elections.” On the other hand, we believe that spreads would settle much lower if there was a relative majority outcome.
Since Macron called an early election on June 9, French stocks FR:PX1 have gone down, but most of those losses were in the first week. Since then, French stocks have been in a holding pattern.
Nikolaos Panigirtzoglou leads a group of analysts at JPMorgan who say investors see the French elections as a problem in France and not in Europe as a whole. Position patterns on key futures contracts have mostly stayed the same, which leads to that conclusion.
One thing that is different is that investors have undone the initial risk-lowering of CAC-40 futures.
“Our position indicator in CAC-40 futures is up a lot from June 7th to June 25th, while it’s down a little for Eurostoxx 50 futures.” They said, “We think this change makes French stocks more vulnerable going forward if the new French government’s fiscal policies turn out to be more problematic than the market currently thinks.”
