Markets Brace for French Elections Risk

Uncertainty around the results of the upcoming elections in France and last-minute promises from left and right parties continue to weigh on stock prices ahead of this weekend's vote.

Markets Do Not Like Surprises

The French index and euro fell due to unexpected news earlier in June that France would hold snap elections following the underperformance of President Emmanuel Macron's party in the European Parliament elections. The European Parliament saw a general shift to the right amid rising anti-establishment sentiment across the continent, though both left—and right-wing parties were punished at the ballot box as Europeans felt their governments failed to deliver on promises. Control of immigration, especially from non-EU countries, is a growing concern.

However, European elections do not always reflect national polls. Voters typically focus more on their own country's politics than at the EU level and typically see bigger swings due to protest votes. Nevertheless, this has not eased concerns in political and financial circles. While stock markets have recovered somewhat, traders are still concerned about the ongoing uncertainty over the election results and the current political situation could provide some relief if the weekend results reaffirm the current political order.

​​Assessing the Chances

Recent polls in France point to the far-right National Rally party led by Jordan Bardella winning the upcoming election, suggesting that the European Parliament vote was not just a protest. Macron's party has fallen to third place to the left-wing New Popular Front, with the former causing more uncertainty in the markets recently. However, no single party appears positioned to gain a majority, with speculation rising of an "expert-led government" similar to Italy's model under Draghi. This could help avoid political deadlock and prevent the far-right from taking power. However, if the National Rally receives the most votes, the centrist and left parties will have to form an unpopular minority government together. This prolonged uncertainty would likely attract negative reactions from markets.

Even in a better scenario of a clear winner, promises made during campaigning by parties may leave a bitter taste. More radical policies, such as pledges to raise wages, reduce gasoline taxes and ensure earlier retirement ages, are proposed to attract votes but may be difficult or expensive to implement. Many analysts worry about a "Liz Truss-style" bond market crisis requiring intervention. With the first round of voting this weekend and the final results on July 7th (after the UK general election), the outcome will remain uncertain until another week passes. However, how people vote this weekend could relieve markets or add more uncertainty about what may follow.

French Index to Form H&S?

The France 40 index has fallen around 8% since reaching double-top resistance at 8260 and following support at 7500. Breaking lower could see a drop to 6750 if 7270 is breached, raising the likelihood of a head-and-shoulders (H&S) pattern with shoulders at 7600. Alternatively, the index may be completing an ending wedge pattern should it regain 7900 and could head new record highs or enter a period of extended consolidation.

Source: SpreadEx / France 40

Key Takeaways

Despite rebounding, the upcoming French election continues to weigh on markets due to uncertainty over the results. Polls show the far-right party gaining support, though no party may gain a majority, requiring coalition talks. How people vote this weekend could relieve or add uncertainty over what policies may be implemented and their impact on the economy and markets.