Shock from French General Election Continues... Stock and Bond Markets Fluctuate

French Stock Market CAC Index Declines for 3 Consecutive Trading Days
French 10-Year Government Bond Yields Surge
Spread Gap with Germany Widens to Largest Since European Debt Crisis
Unexpected Post-Election Parliament Faces Clash Over Government Formation

French leader M?lenchon raising both arms.
[Image source=Yonhap News]

The unexpected shockwave from the French general election is causing turmoil in the French stock and bond markets. The surprise victory of the left-wing coalition and the formation of a hung parliament (a non-majority legislature where no faction holds a majority) have introduced uncertainty into the French economy and national finances.

The CAC index, France's representative stock market index, plunged 1.56% on the 9th (local time), while the pan-European Euro Stoxx 50 index also fell 1.33% on the same day. Shares of France's leading luxury companies Louis Vuitton Mo?t Hennessy and Herm?s dropped by 1.26% and 1.34%, respectively.

Bloomberg reported that the ongoing aftermath of the unexpected French general election has led to concerns that the various political parties will express differing opinions in forming a government, prolonging political turmoil, which was the background for the sharp stock market decline. The CAC index and Euro Stoxx 50 index have both been falling for three consecutive trading days.

The French bond market is also unsettled. The spread between the French 10-year government bond yield and the German 10-year government bond yield has widened to about 70 basis points (1bp = 0.01 percentage point). Major foreign media outlets reported that this is the largest gap since the European sovereign debt crisis period (2009?2010). Soci?t? G?n?rale (SG) SA, a French bank, explained that the risk spread on French bonds has increased because the left-wing coalition won the general election.

The sharp drop in the French stock market and the surge in bond yields are due to the lingering shock from the general election held on the 7th. In the first round of voting on the 30th of last month, it was expected that the far-right party would secure a majority in parliament, but contrary to expectations, the left-wing coalition, the New Popular Front (NFP), took first place, and no party secured an outright majority (289 seats) in the assembly.

The day before, the French parliament witnessed disputes over the next prime minister position and government operation. The NFP, as the largest party, insists that the prime minister should come from their party and form the government, but President Emmanuel Macron's centrist coalition has expressed that far-left party members should not be included in government operations. With the risk of political deadlock increasing from the start of the new parliament and economic and fiscal issues likely to be sidelined, market sell-offs continued, analysts say.

The French National Institute of Statistics and Economic Studies (Insee) forecasted that France's GDP growth for this year will be 1.1%, a more optimistic outlook than the International Monetary Fund's (IMF) prediction of 0.8%, but added that "changes in France's political situation pose a significant risk to the growth scenario."

International credit rating agency Moody's stated that if France's new political conflicts are judged to worsen the national debt, it may revise France's credit rating outlook to negative. France's fiscal deficit stood at 5.5% of GDP last year, significantly exceeding the government's forecast of 4.9%.