France: high-stakes election

After his party lost heavily to the far-right in European elections, French President Emmanuel Macron has decided to dissolve the French lower house of parliament and call early general elections for 30 June and 7 July. This is a high-stakes move, raising the risk of a “cohabitation” between the incumbent president and a prime minister from another party, possibly from the far-right Rassemblement National (RN).

An immediate threat for the market would be the next budget including controversial measures that could weigh on public finances and fuel inflation risks.

Indeed, the fragile state of French public finances along with the large share of foreign holdings of government bonds may fuel volatility in the bond market in coming weeks, although rating agencies are unlikely to take further action until we get more clarity on the political and fiscal fronts.