Just two weeks from now, voters in two of Europe’s three biggest economies will decide who wins. The results could not be more different for prices.
French President Emanuel Macron called for a referendum on June 30 and a second round on July 7. The markets for stocks, bonds, and currencies are already very tense about it. On the other hand, traders haven’t said a word about the earlier-than-expected poll called by U.K. Prime Minister Rishi Sunak.
To put it simply, France is creating a situation that investors often find hard to ignore: a lot of political uncertainty that could affect more than just France. In Great Britain, on the other hand, the outcome is pretty clear and won’t change things too much.
The Tory government in the UK is losing support. According to the BBC, the Conservatives are only getting 21% of the vote, while the Labour Party has 42%. If those numbers were true, Labour would normally have a large majority in both houses of parliament.
It used to be that investors liked the more free-market Tories better than the labor-backed Labour Party. New Labour leader Keir Starmer, on the other hand, wants to move the party away from the far-left views of former leader Jeremy Corbyn and toward better relations with the EU.
Also, Rachel Reeves, who used to work as an economist at the Bank of England, is Labour’s candidate for Chancellor of the Exchequer. People trust Reeves because the Conservatives’ September 2022 budget was a disaster that caused a rush to sell government bonds.
Still, Starmer in 10 Downing Street will have an effect on the class of wealthy investors. To get more money for public services, Labour wants to stop people from avoiding paying taxes, raise sales taxes on homes bought by people who don’t live in the U.K., and close tax loopholes for people who don’t live in the U.K.
Sven Jari Stehn, an economist at Goldman Sachs, says that Labour will spend £9.5 billion more each year and tax people £8.6 billion more each year.
The Henley Private Wealth Management Migration Report says that because of these policies, Brexit, and the crackdown on Russian oligarchs, the U.K. will lose a record 9,500 millionaires in 2024—a net loss.
Ruben Gargallo Abargues, an economist at Capital Economics, says he doesn’t think the Labour Party’s return to power will have a big effect on U.K. stocks or change the direction of the domestic economy in the next couple of years.
“Taxes, spending, and investments as a share of GDP might be a bit higher under Labour, and homebuilding and green transition-related investments might be more ambitious,” Gargallo Abargues says. “However, these differences would not change the outlook for the U.K. economy much.”
The FTSE 100 index UK:UKX is down less than 3% since Prime Minister Rishi Sunak called the election on May 22. This is mostly due to a drop in energy and mining companies. The pound GBPUSD, -0.41% has gotten stronger against the U.S. dollar by about 30 pips, and 10-year gilt yields BX:TMBMKGB-10Y are a few basis points lower.
The euro EURUSD, -0.34% has lost more than 1.5 cents against the dollar since French President Macron called an election on June 9. The CAC 40 equity index FR:PX1 is down almost 5%, having already dropped about 10%.
The biggest worry is the change in government bonds. The difference in yields between 10-year German bunds BX:TMBMKDE-10Y and 10-year French paper BX:TMBMKFR-10Y, also known as OATS, has grown from less than 50 basis points to 73.
The OATS/Bunds spread is getting wider, which means investors want more money for the risk of holding French debt. That’s because people think Macron might have made a mistake when he called a snap election after the far right lost the EP elections in June.
Ifop released a poll on June 17 that shows Marine Le Pen’s far-right National Rally would get 33% of the vote in the first round of the French legislative election. An alliance of left-wing parties would get 28%, and Macron’s party would come in third with 18%.
So, it’s not clear if Macron, who will stay in office, will have to live with the far right or a left that is becoming more populist. But investors are worried about both outcomes because they are both anti-capitalist and their policies could affect how well the European Union works together.
Thierry Wizman, global interest rates and currency strategist at Macquarie, says that the plans of both France’s populist-right and its left-wing coalition (the “Popular Front”) are very different from pro-market principles and fiscal responsibility.
Wizman adds, “Both would be big changes from current policy and, if put into action, could hurt France’s relationship with the EU.”
Macron raised the retirement age to 64, but National Rally wants to lower it back to 62. They also want a more progressive tax system and protectionist measures to protect French workers from globalization.
It’s what the Popular Front wants to do: lower the retirement age to 60, not follow the EU’s rules on stability and growth, freeze prices, and raise taxes on capital gains and company profits to pay for social programs.
“An NR-led government could test the new EU fiscal framework, which could have far-reaching effects,” says a team at JPMorgan led by Marko Kolanovic. This is why the OAT-Bund spread jumped to over 70bps.
People who invest in stocks are voting with their money. The biggest stock market in Europe has been passed back to London from the French stock market. This happened because shares of once-globally-famous luxury goods companies fell.
This week, Citi analysts changed their rating for stocks in continental Europe from “overweight” to “neutral.” They said, “Near-term risks for European equities have increased, with markets narrowing and political uncertainty taking center stage.”
“The CAC 40 has broken below its 200-day moving average,” says Alex Kuptsikevich, a senior market analyst at FxPro. “It could fall another 9%.” The iShares MSCI France ETF EWQ lets investors in the United States buy French stocks.
At Macquarie, Wizman thinks that worries about France’s relationship with the EU will cause the euro to drop in value to around $1.05 in the third quarter. The OATS/Bunds spread “could grow by another 20 basis points as the date of the election draws closer,” says Christoph Schon, a senior researcher at SimCorp.
If investors outside of Europe aren’t worried about the problems caused by France, they might think about how other problems in the eurozone, like the Greek debt crisis a decade ago, hurt global mood.
As always in the eurozone, worries about one country, especially a big one, spread to other countries. “Spans have gone up not only in France but also in other countries that were seen as weak,” says Hubert de Barochez, a senior markets economist at Capital Economics.
France and the EU are already at odds with each other, but on Wednesday, the EU’s executive arm criticized France for taking on too much debt.
Indeed, Italian fashion brand Golden Goose said on Wednesday that the stress caused by politics was hurting market confidence, which is why it was delaying its IPO on the Euronext Milan stock exchange.
There are, of course, investors who think that the market’s worry about the French election is excessive and that chances are being made. On Wednesday, Beat Wittman, a partner at Porta Advisors, told CNBC that he planned to “aggressively buy OATS at this price.”
