What’s next for markets after the rise of the far right in the European elections sparked a shock vote in France?

By Yoruk Bahceli and Samuel Indyk

(Reuters) – Far-right gains in European Parliament elections that prompted French President Emmanuel Macron to call a shock national vote put squarely back the focus on political risks in Europe that financial markets had long highlighted night light.

The euro, French stocks and government debt all took a hit on Monday as investors weighed whether the far right could repeat its success in the French election and how much influence far-right parties could have on the new executive. ‘European Union.

“Further economic integration will be slowed down instead of accelerated,” said Carsten Brzeski, global head of macro at ING, referring to the EU’s rightward shift.

Here are five key questions for the markets:

1/ WHAT DOES A QUICK FRENCH ELECTION MEAN FOR THE MARKETS?

French stocks are clearly losing out from Macron’s surprise decision, which comes after a crushing defeat by Marine Le Pen’s far-right National Rally (RN) in the European elections.

Major lenders BNP Paribas and Société Générale both fell 8% on Monday.

Emmanuel Cau, head of European equity strategy at Barclays, expects banks and utilities to be hardest hit by the uncertainty. Another concern was that populist parties could push for a bank tax, which could also create unease.

French government bonds could also suffer.

Major investors have already shunned them because of their high deficit: S&P has just lowered France’s credit rating.

The risk is that the government is less likely to comply with EU rules on controlling deficits, Deutsche Bank said, also noting the Socialist Party’s strong showing.

The yield gap on 10-year Franco-German bonds widened by 7 basis points on Monday to 55 basis points, but remains well below the 80 basis points reached in 2017 when Le Pen, now less eurosceptic, committed to leaving the euro.

“We expect some underperformance of French assets and, by extension, some underperformance of European assets, because that adds a bit to the European risk premium,” said Mark Dowding, chief investment officer of BlueBay Asset Management.

He has an underweight position on French debt and said France’s spread could widen by more than 70 basis points if the RN wins.

2/ IS EUROPEAN INTEGRATION THREATENED?

During the COVID-19 pandemic, the EU has taken unprecedented steps towards a fiscal union with an €800 billion recovery fund, with France a key player in achieving this. A shift to the right in this country and beyond could weaken the case for further action.

The risk premium on bonds issued by Italy, one of the main beneficiaries of the recovery program after the pandemic, widened on Monday but remains well contained.

Longer term, reduced prospects for programs similar to the recovery fund would imply a higher structural risk premium on the bonds of the bloc’s highly indebted countries, Citi analysts say.

3/ WILL EUROPEAN CLIMATE POLICIES SUFFER?

The Greens were among the biggest losers in the European elections.

The shift to the right is unlikely to reverse existing climate policies, but could make it harder to pass new policies and add loopholes to weaken laws…

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