Declining political risk in France after first round of elections improves investor sentiment 📢
The first round of accelerated elections in France is behind us. As many people expected, it led to a reduction in investor concerns about France's future, resulting in a rebound in the euro, a decrease in the spread between French and German bond yields, and ultimately a recovery in the French stock index CAC 40 (FRA40).
The elections, as expected, were won by the National Rally led by Marine Le Pen, which received just over 33% of the vote with a turnout of almost 67%. The "center" of current President Emmanuel Macron garnered 21% of the vote, slightly better than expected. Although the far-right is likely to take control of the government for the first time in recent years, it will not be a majority government. It is expected that some parties may decide to field a single candidate against National Rally candidates in some districts, which could lead to an even greater decline in support for Marine Le Pen's party.
Previously, the market was greatly concerned about the takeover by the anti-European and populist party. However, it seems that the National Rally will not be able to govern alone, which may mean a lack of radical policy changes. It also appears that the potential takeover by far-left parties is unlikely, as the New Popular Union received exactly 29%, which was in line with expectations.
In response, we observed a noticeable decrease in the yield spread between French and German bonds. However, it's worth noting that overall yields rebounded during today's session. Source: Bloomberg Finance LP, XTB.
The FRA40 is bouncing back today but is largely reducing its gains and nearly closing the entire gap formed at the opening. Earlier, the contract tested recent local peaks at the 7735-point level, which also serves as the neckline of a potential double bottom formation. The range of this formation indicates a target around 8000 points, very close to where the contract was before the accelerated elections were called (8045 points). More importantly, the lower limit of the previous major correction range is maintained at 7415 points. A potential factor supporting the continuation of the FRA40 rebound will be the formation of an inverse head and shoulders pattern on the EURUSD, although the neckline is only around the 1.085-1.090 level. Only a break above these levels could confirm the pattern.
Source: xStation 5
