Elections update
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Article Type
Market Updates
Topics
Long-Term Outlook, Opinion
Published
July 09, 2024
Read time
5 mins
Author
Aegon Asset Management
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Introduction

 

Last week was packed with political news. On Thursday, elections took place in the UK. The Labour Party booked a landslide victory. On Sunday, the second round of the French elections took place, where the leftist alliance was the surprise victor. Presidents Macrons group came second, while Le Pens National Rally (RN) party ended third. Markets have reacted to these developments, but it remains to be seen how this will shift political currents, policies and what the economic impact will be. Below we summarize the early market reactions for various asset classes.

 

Zooming in on France: an unexpected result

 

France has a district system, in which each district votes for one member of parliament. This makes predicting the outcome very difficult as it depends on the type of candidates in each district in the second round of voting. Before the second round, the left and Macrons party tactically withdrew from many districts to increase the chances of one of them winning from the RN. This system has proved successful in limiting the rise of the far -right. The graph below shows this effect. For instance, the RN received a whopping 37% of the popular vote, while it only gained 25% of the seats in parliament. The polls were correct in forecasting a strong showing of the RN, but this didnt translate into an equally sizable win in seats.

 

Seats and popular vote in French parliamentary elections

 

Seats and popular vote in French parliamentary elections

 

Figure 1: Seats and the popular vote in French parliamentary elections. Source: Aegon AM, Politico. Data as per 07/2024.

 

Macron has said that he will remain president regardless of the outcome. The next presidential elections are scheduled for early 2027, and Macron is not allowed to run for a third term.

 

The outcome of this election points to a significant support for RN, therefore the risk of a Le Pen presidency is still large and will depend on the popularity of the other candidate.

 

Initial reaction on the UK and French elections in the rates and credit markets

 

The historic Labour landslide in the UK general election has been well received by the market and most of the directionality in rates was dictated by US labor data on Friday. At this stage, it is still unclear whether Starmers agenda would entail less fiscal discipline and its implications for gilts issuance going forward. Consensus has the newly elected government taking time to assess the fiscal situation and present a one-year budget.

 

The unexpected results of the French election with the more extreme fiscal tail risk trimmed have triggered a three basis points widening at the opening of trading, which was largely reversed right after. It seems the market has quickly digested the outcome and the constructive price action indicates market participants are complacent about a weak relative majority scenario. Sovereign credit spreads have opened mostly in line with their historical betas vs French OATs yet far from the knee-jerk reaction witnessed after Macrons call for a snap election. Cash bonds have seen very little flows over the early session with OAT futures dominating the price action. Asset swap spreads have followed suit resuming the tightening which was evenly distributed across the curve as the relative dearness in fronter tenures had already been widely faded by investors. This political stalemate is negative for French OATs as the formation of a left-center government has been repeatedly ruled out by Macron and his allies. From a fiscal perspective, a fragmented parliament will struggle to deliver any substantial and credible fiscal consolidation measures. We remain defensive on the credit given the looming September deadline for the French government to submit a strategy to the EU Commission to reduce its deficit.

 

With the credit market not having priced in any credit risk premium into the UK elections, it was no surprise that there was no reaction to the Labour majority. Given the partyandacute;s stated commitment to fiscal prudence, the results were not impactful on credit markets. The markets will keep an eye on fiscal plans as the details are unveiled. Domestic sectors like water utilities could benefit in the medium term as public investment is increased, however, it would take some time before measures are announced and formalized into law.

 

The first round of the French elections and subsequent polls already indicated that neither Marine Le Pen's party nor the left front would be able to get a majority in parliament. This led to a relief rally in markets ahead of the second round. With the win by the left-wing coalition, markets on Monday morning opened with credit spreads broadly unchanged and French risk a touch weaker. The question remains what the government will look like and whether economic policies will be managed in a way that does not alarm financial markets. For now, the market continues to trade relatively firmly.

 

Initial reaction in equities- and currency markets

 

The UK equity market reaction to the election outcome was relatively muted. British domestic-focused home construction companies and domestic-focused mid-cap stocks reacted positively.

 

In France, equity indices initially fell when the snap elections were announced, with the most pronounced losses in financial, infrastructure and energy stocks. After the first election round, market sentiment improved as polls showed the National Rally party would fall short of an outright majority, and about half of the initial losses were erased. After the - unexpected - results of the second round of elections, the equity market reaction was neutral to mildly positive.

 

For the British pound the UK election result had no real election implications, as a large Labour majority was anticipated. The landslide election victory gives the party, led by Kier Starmer, a clear mandate to govern. Over the medium term this may be constructive for the currency as it likely brings a period of sustained political stability to the UK. The bigger driver in the near term will be monetary policy. An August rate cut by the Bank of England would be a headwind for the currency, particularly as the market positioning has built up.

 

The euro initially dipped after the second round French election results, as the left winning the most seats caused marketconcern about post-election finances. Given it is unlikely the left will be able to form a government, this leads to potentially political paralysis with an ineffective government, that wont benefit the currency in the months ahead. Similar to the GBP, the bigger driver of the euro will remain monetary policy and the shift of ECB, and Fed policy divergence. TheUS election, particularly a Trump win will bring risks of tariffs to Europe, and the currency will be vulnerable. In addition, slowing China impulses favor selling the euro on any rally.

 

Authors:
Annemarie Coldeweijer
Luca Ferramosca
Gareth Gettinby
Jordy Hermanns
Jacob Vijverberg

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Aegon Asset Management

We are active global investors. In a complex world we think and act across traditional boundaries. We organize our teams globally by asset class, to bring the breadth and depth of our investment and research capabilities together for clients across the world. 

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