Global Rates & Economics: State of play after the first round of the French election, UK election update
Jul 2, 2024
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Global rates and economics experts Francis Diamond, Raphael Brun-Aguerre, and Aditya Chordia discuss the French election's first round impact on markets, potential outcomes for the second round, implications for European fixed income markets, and a brief look at the upcoming UK general election.
After the French election, markets showed a risk-on move and spread tightening in French bonds, reflecting reduced tail risk scenarios and clearer potential outcomes.
The upcoming UK election is expected to result in a Labour win with minimal fiscal changes, focusing on longer-term implications of Labour's fiscal stance on growth and fiscal headroom.
Deep dives
French Election First Round Results and Potential Outcomes
Following the first round of the French election, key results included Marine Le Pen's party leading with 33% of the votes, a left alliance at 28%, and Macron's party in third. The upcoming second round involves strategy shifts, with party leaders urging weaker candidates to step down to hinder Le Pen's success. Potential outcomes range from Le Pen gaining a majority to a workable or weak relative majority that impacts legislative efficiency and governance stability.
Market Response and Outlook Post First Round
Post the French election first round, markets experienced a risk-on move and spread tightening in French bonds. The reduced tail risk scenarios and clearer potential outcomes led to market relief and stabilization. Market expectations center on a Le Pen-led government or relative majority, which could influence fiscal policies and market stability. Broader European rate markets have been range-bound, with the French political noise having a limited systemic impact, maintaining expectations for ECB monetary policy.
Upcoming UK Election and Long-Term Market Implications
The upcoming UK election is foreseen as a likely Labour win, with minimal anticipated fiscal changes. Market sentiment suggests limited short-term impact but focuses on longer-term implications of Labour's fiscal stance on growth and fiscal headroom. Expectations revolve around a gradually unfolding fiscal narrative post-election, with key attention on future budgets and sustainable macroeconomic policies to gauge market shifts over time.
Strategists Francis Diamond, Raphael Brun-Aguerre and Aditya Chordia discuss the first round of voting in the French elections, implications for the outcome after the second round and the recent reaction in French spreads and broader European fixed income markets. They also touch briefly on the upcoming UK general election.