French stocks rose and bonds fluctuated slightly, because traders weighed the assurance of extreme right-wing leader Marina Le Pen, who said that if she won the national election, she would cooperate with President Makron.
As of 5:04 p.m. Paris time, France's CAC 40 benchmark index rose 0.9%. As Citigroup downgraded the stock rating of the region, major European stock market indexes fluctuated between ups and downs, including "increased political risk". French government bond yields rose again on Monday, while the interest margin with Germany remained basically stable.
After Makron announced the early election later this month, people's concerns about political unrest triggered the sell-off of assets based on hedging last week, and the stock market value of the country lost 258 billion dollars. On Monday, traders initially caught Le Pen's statement that he would not try to overthrow Makron, but before the first round of voting on June 30, market sentiment was still fragile.
Evelyne Gomez Liechti, interest rate strategist of Mizuho International, said: "Investors should stay out of the way at present." She said that although "there may be some short-term small consolidation", there is still huge uncertainty in view of Le Pen's lack of clarity in economic policies at the National Congress.
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Last week's decline led France to lag behind the UK and become the largest stock market in Europe. The slump wiped out all the gains of the CAC 40 benchmark index in 2024 - in sharp contrast to the historical high set a month ago. The spread between the euro denominated junk bond index - nearly a fifth of which consists of French companies - and the benchmark index has widened significantly to the highest level since early April.
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Last week's decline also spread to the broader European stock market, with the benchmark Stoxx Europe 600 index having its worst week since October. The index rose 0.1% after rising 0.7%.
Not "chaos"
Many officials and strategists said the decline was too large.
"Of course what we see in the market is repricing," Philip Lane, chief economist of the European Central Bank, said at an event organized in London on Monday. "You know, this is not a chaotic market dynamic world."
According to Joachim Klement and Susana Cruz of Liberum, the concern about the right-wing prime minister has been exaggerated, and the market will calm down after the vote.
Although an indicator measuring the risk of revaluation (that is, the risk of France leaving the euro zone) rose sharply last week, it is still far below the level when Le Pen, the then presidential candidate, advocated leaving the EU in 2017. Since then, the party's position on the EU has softened.
Frederick Carlyle, head of investment strategy of RBC Wealth Management Company, pointed out that once populist politicians took power, they would move closer to the middle. Le Pen's comments inspired people's hope for such an outcome in France.
Nevertheless, "foreign investors are nervous about the increased political risks brought about by the situation in France," she said.
This tension has further blurred the boundaries of Europe's traditional debt rating, making French bonds at the same level as bonds that were once at the heart of the region's debt crisis.
The yield of Portuguese bonds is now lower than that of similar French bonds, while the gap between the 10-year bond yields of Spain and France has narrowed to only 11 basis points, which is the smallest gap since 2008 at the closing price.
This is an extension of the long-term trend that has existed for many years. In view of the mountains of French debt, investors are demanding more and more compensation. The European Commission is expected to launch an excessive deficit procedure against France this week, which aims to force member states to solve public finance problems in accordance with EU rules.
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