The last few days have been tough for Europe. While the focus last week was on the ECB and rate cuts, that turned out to be less than a market mover. European elections on the other hand are stirring up a storm, weighing on the Euro and European equities across the board.
France’s Macron called a snap election and France’s Equities, the CAC Index is leading the way lower. Yesterday, French bonds began to tumble and the spread between the yields for France, Spain, and Italy widened in relation to Germany.
10Y yield spread with Germany - Italy (Grey); Spain (Blue); France (Purple)
The 5-year Credit Default Swap (CDS) for France also started to rise.
France - 5-year CDS
The election results saw more far-right parties gaining ground. The worry is that if the RN (Rassemblement National) win the elections in France, there will be more fiscal spending, tax cuts and policy changes at a time when France is already struggling with high Debt to GDP (~110%) and Fiscal Deficits, which earned them a downgrade from AA to AA- from S&P. While the Outlook was maintained at stable, these changes could very well see a revision to a Negative Outlook for France.
This could also be the case for broader Europe and that definitely has implications for Euro Area economy, markets, and the currency.
What we cover:
The Economic Impact of the European Elections in General
The European Commission and the European Parliament do not have the same discretionary powers as other presidents and state leaders but, over the years their powers have increased and the economic impact of the elections will be more gradual.