EURUSD, CAC stumbled on French political & policy uncertainty

·         Although the far-right Pen’ alliance may not get a simple majority in the Lower House, a hung Parliament may create policy paralysis for Centrist Macron

France’s benchmark stock index CAC-40 and EURUSD were already under stress for the last few weeks soon after French President Macron called for a surprising snap/early election for the French legislative assemblies (provincial/state assembly election) after his ‘surprising’ defeat in the EU Parliament election. On 9th June’24, Macron unexpectedly dissolved the French National Assembly and called snap elections in a national address following projections that indicated that the EU Parliament would be significantly dominated by the RN/LFR (in the European Parliament elections in France).

The far-right RN/LFR led by Le Pen was estimated to get 30 seats with 31.37% of votes, followed by BDE with 13 seats (14.50%) and RIE with 13 seats (13.83%) out of 81 French seats in the EU Parliament. In his address, Macron called the rise of nationalism by agitators a threat to France, Europe, and France's place in the world. He also warned that the far-right would bring about the "impoverishment of the French people and the downfall of our country."

The French political system includes both Legislative (Lower House-House) and Presidential (Upper House-Senate) elections, each with its own processes and timelines; Legislative elections are held usually a few weeks after the Presidential election unlike after 2-years in the US (mid-term election); both Legislative and Presidential elections are held every five years under identical two-round voting system: If no candidate receives a majority (over 50%) of votes in the 1st  round, a 2nd round is held between the top two candidates in the Legislative Election, while in the Presidential Election, if a candidate gets more than 50% of the votes, they win outright, but If no candidate gets a majority in the 1st round, the top two candidates face off in the 2nd round. And the candidate with the most votes in the second round wins.

The French Parliament is bicameral, consisting of the National Assembly (lower House) and the Senate (upper House); Legislative elections pertain to the National Assembly. In the Legislative Election, candidates who receive at least 12.5% of the registered voters' votes in the 1st round can progress to the 2nd round. There are 577 seats in the National Assembly, each representing a different constituency.

French Presidential Role: The President is the head of state, with significant powers including appointing the Prime Minister (PM), presiding over the Council of Ministers, and representing France in international affairs.

French Legislative Role: The National Assembly (Lower House) has significant legislative powers, including the ability to pass laws and oversee the government. The Senate (Upper House), although influential, has less power compared to the National Assembly.

There are many political parties (big/small) in France led by the DM/LREM (Ensemble) alliance led by Macron; the 2022 elections are mainly contested between three blocs: a left-wing bloc (NUPES), a presidential (Macron) bloc on the center-right (Ensemble), and a far-right bloc led by Li Pen.

Following the 2022 legislative election, Ensemble lost its absolute majority in the National Assembly, where the member party of the coalition was Macron's party Renaissance (LREM). Meanwhile, the two main opposition blocs, the left-wing New Ecological and Social People's Union (NUPES) and far-right National Rally (RN) made significant gains in terms of seats. Despite that, no group won the absolute majority, resulting in a hung parliament for the first time since the 1988 election. The lack of an absolute majority led to a virtually political & policy paralysis-like situation in France for the last few years.

On 30th June, People in France voted in the 1st round to elect 577 members of the country’s National Assembly. The 2024 French legislative election will be held in two rounds on 30th June 30 and 7th July after President Macron dissolved the National Assembly (Lower House) and called a snap election. The election was called in the aftermath of the 2024 European (EU) Parliament election, in which Macron's centrist alliance (RN) lost ground to the far-right National Rally (NR). The 2024 French Legislative Assembly election pre-poll alliance is as follows:

In the 1st round French Legislative Assembly election 30th June (76 seats) the RN secured the largest share of the vote with 33.15% (38 seats) followed by the left-wing New Popular Front (NFP) with 28.14% (32 seats), Macron's Ensemble (EN) coalition with 21.27% (2 seats), and The Republicans (LR) with 10.22% (3 seats); Voter turnout was 66.71%. The 1st round results set up a highly fragmented National Assembly, with no bloc securing an outright simple majority of 289 seats out of 577 seats. The NR and its allies qualified for the 2nd round in 444 constituencies, compared to 414 for the NFP, 321 for EN, and 88 for LR. The high number of three-way runoffs in the second round, a result of the tri-polarization of French politics, raised the prospect of political deadlock if no bloc can secure a majority.

In an unprecedented scenario, Macron could be forced to appoint a non-partisan caretaker government if the stalemate continues after the second round. The 2024 legislative election represents a major setback for Macron and his centrist agenda, with the far-right and left-wing forces making historic gains. The results are likely to have a significant impact on the political landscape leading up to the next scheduled French presidential election in 2027.  Overall, the 2024 legislative election results represent a major setback for Macron and could lead to political & policy paralysis and may also change the scheduled date of the next French presidential election in 2027.

In this way, there are three broad scenarios after the outcome of the 2024 French Legislative Election:

   Pro-EU Government:

·         Stability and Confidence: If a pro-EU government is elected, it can lead to increased investor confidence in the Eurozone. This could potentially strengthen the EUR as markets anticipate stable economic policies and continued integration with the EU fiscal & monetary (ECB) authority.

·         Positive Economic Reforms: Pro-EU governments often pursue policies that encourage economic growth, such as labor market reforms and investment in innovation, which can further boost the EUR, CAC-40

Anti-EU (Eurosceptic) or Populist (far-right) Government:

·         Uncertainty and Volatility: An anti-EU or populist government might lead to increased uncertainty about France’s commitment to the EU and the Eurozone. This could result in increased volatility and a potential weakening of the EUR (Frexit concern like Brexit)

·         Policy Shifts: Populist policies might focus more on protectionism and less on fiscal discipline, which can be seen as negative by the market, potentially leading to EUR, CAC-40 weakness

  Coalition Government:

·         Policy Gridlock: A coalition government, especially one with diverse political parties, might face difficulties in passing significant economic reforms. This could lead to a period of policy gridlock (paralysis), creating uncertainty and potentially weakening the EUR.

·         Balanced Policies: On the other hand, a balanced coalition might result in moderate policies that aim to balance growth and stability, which could have a neutral or slightly positive impact on the EUR

Le Pen’s far-right National Rally party made big gains in the 1st round of legislative elections Sunday (30th June), winning an estimated 34% of votes, nearly double their 18% in the 1st round in 2022. French President Macron has called on voters to block the far right in the 2nd round of voting 7th July. France’s high-stakes legislative elections propelled the far-right National Rally to a strong but not decisive lead in the first-round vote Sunday. The projections indicated that Macron's risky decision to call voters back to the polls for the second time in three weeks appeared to have backfired.

As per 1st round exit polls and projections, Macron’s EN alliance behind both Marine Le Pen’s National Rally and a new left-wing coalition of parties that joined forces to keep her anti-immigration party with historical links to antisemitism from being able to form the first far-right government in France since World War II. But with another torrid week of campaigning to come before the decisive final voting next Sunday, the election’s outcome remained uncertain.

Macron urged voters to rally against the far right in the second round, while Le Pen called on her supporters and voters who didn't back her party in the first round to push it over the line and give it a commanding legislative majority. In that scenario, Le Pen's 28-year-old protégé Bardella, would become next PM. Macron, who has said he will not step down before his term expires in 2027, would be forced into an awkward power-sharing arrangement called “cohabitation” (coalition) in France.

Market impact:

On early Monday European session, EUR and also CAC-40 and other European indices got some boost as Le Pen’s far-right National Rally (RN) party led the first round, but with a narrower margin than some polls had predicted and falling short of a majority, which may eventually cause a coalition government with less expansive fiscal agenda and less Eurosceptic stance. Macron is also changing his narrative focusing on Islam and immigration issues in line with Le Pen for domestic political compulsion. EU leaders will also support liberal Macron rather than hard-liner Li Pen.

Macron would be good for stock market sentiment compared to Li Pen. Macron was primarily elected in 2017 and 2022 as President on the Reformed and Pro-European agenda. However, some of his biggest structural plans, including a proposed change to the pension system, were not implemented in the wake of the COVID pandemic. In the meanwhile, Le Pen was also able to change her erstwhile extreme right-wing brand of politics to more mainstream ones (centrist). Macron won in 2022 too irrespective of this regional election outcome due to his pro-reformist and liberal/centrist leadership appeal. But this time Macron may lose amid an anti-incumbent wave and an urge for a change in top leadership. But for the time being, the Market is calm as Le Pen may not get the simple majority in the current Legislative Election for any monumental change in French policy like Frexit.

We may see hung Parliament for months and political and policy paralysis to some extent, although it’s nothing new in Europe and the overall system/economy will go on as usual as there are political partisan (supports) for all important economic policy decisions and the overall political system/Parliament is designed in such a way, that ruling political party/alliance or even head of state has limited legislative power for checks & balances so that electoral democracy may not turn into an electoral autocracy.

 Technical trading levels: EURUSD

Whatever the narrative, technically EURUSD (1.07500) now has to sustain above 1.08500-1.09500 for any further rally to 1.10000* and 1.11500/1.11800-1.12500/1.13000* and 1/14500-1.17400 in the coming days; otherwise sustaining below 1.08600/1.08300-1.08000/1.07700, may again fall to 1.06700/1.0600--1.05300/1.05000* and even 1.0000/0.95000 in the coming days (in case ECB goes for further rate cuts despite Fed being on hold till at least Dec’24).

Similarly, CAC-40 now has to sustain over 7400 for any recovery to 8000-8320 again; otherwise, it may again fall to 6700-6200 levels in the coming days.