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The first round of the French National Assembly elections was completed last weekend and we await the final round of voting next weekend. The first-round results were close to expectations although the far-right party RN were modestly behind forecasts.
The euro area equity market rallied as it appeared that RN is unlikely to have a majority in the National Assembly. The bond market looked at it in a slightly different way.
The chart below shows the movement in the French 10-year yield (navy line) and its spread over the German equivalent (grey line), which is a measure of risk in the French bond market. As you can see, at the time of the European Parliament election, the yield spread spiked upwards as the support for the Eurosceptic parties increased in France and President Macron called a surprise election. It has subsided since the first-round result. However, the absolute level of the 10-year yield has continued to rise. With a fractured National Assembly, can a budget be agreed that will satisfy the EU fiscal rules? That is what is worrying the bond market. If France cannot be brought within the EU fiscal rules, what does it mean for more wayward countries? And so, there is rising risk across the region, but that could be throwing up an opportunity.
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