European stocks start cautious week after French elections

There left won the elections in France, but the country remains without a majority and with an uncertain future ahead. The wall erected by the left-wing coalition to stop the rising wave of Marine Le Pen’s right, against all previous predictions, has obtained more votes of any other group in the National Assembly and will now have to play the alliance card to be able to form a government.

The New Popular Frontthe coalition that brought together all the left-wing forces led by Jean-Luc MélenchonHe obtained 182 seats in parliament, while the Ensemblethe President’s party Macronstopped at 168 seatsbut above all paid the price for the victory of the left National Rally by Marine Le Pen, stuck at 143 seats after having really hoped to conquer parliament and form a government. The left alone will not be able to govern and, therefore, on the political front the delicate game of alliancesnot an easy game since the far left does not look favorably on an alliance with the centrists that the more moderate wing hopes for.

Markets are betting on a certain scenario

For a certain financerepresented by the victory of the leftis always better than uncertainwhich would have occurred in the event of a victory of a far-right party, especially if a new extremist majority on the Le Pen model had upset the balance in Europe. It remains to be seen, of course, which coalition will be formed and with what breadth of maneuver, since no one has obtained a majority.

“A ‘rainbow coalition’ or an ‘interim government’ are possible. This it is certainly not the most politically appealing resultbut it is not not even the most unfavorable for the market,” says Peter Goves, Head of Developed Market Debt Sovereign Research at MFS Investment Management.

Calm Stocks and Spreads

The bags give a positive signal at first glance, but the exchanges are marked by cautionas revealed by the weak performance of futures on the main indices before the opening.

The Cac-40 Paris Index records a modest increase of 0.49%, while Frankfurt gains 0.45% and Milan shows a stronger progress of 0.55%. London is flat, where the FTSE 100 index drops 0.02%.

The OAT-Bund Spread this morning he jumped on a maximum of 77 pointsbefore settling back to 61.7 (-13%). MFS Investment Management forecasts that the OAT-Bund spread could “find some comfort in the short term” and remain in the 70-90 bp range, but “we are still facing a potentially unstable political environment in the medium term. Relations with the EU could turn out to be anything but positive, especially in the EDP context”.

The anti-spread shield hypothesis set aside

An article in the FT last week had spoken of the possibility of France activating the so-called anti-spread shield (Transmission Protection Instrument or TPI) by the ECB, in the event of a violent reaction by the markets. A hypothesis that, given the reaction of the stock exchanges, appears to be set aside for now.

Among other things, Gilles Moec, Chief Economist of AXA and head of AXA IM Researchconsiders an immediate activation of the instrument a bit unlikely. “Given the perplexities in some key countries – he explains – the ECB should ensure that the action is ‘proportionate’ to the risk, which suggests that a widening of the spread would have to seriously hit the economy to trigger the TPI. The tool serves to mitigate a crisis, not to nip it in the bud“.