Relief rally for euro, French stocks cut short

The “relief rally” for the euro and French stocks we described yesterday didn’t last long – as I’ve said here several times, I think the market is under-pricing the risk re: France. 

It’s not that there will be a euro crisis on Monday morning, or a Rassemblement National (RN, lit. “National Rally”) government would crash French bonds with a massive spending splurge, but there is undoubtedly a higher degree of economic and political uncertainty. And I think Macron’s days would be numbered. Both the far left and the right would agree that “Macronism” is dead.

A lot will depend on who withdraws from the three-horse races. There have been about 190 withdrawals from around 300 three-way runoffs so far, leaving 121 three-ways, according to Le Monde – the deadline for applications is tonight.

A lot will also depend on who is bowing out and where. It’s not clear yet if there is a generalised Republican front strong enough to hold back RN.

Again, from Le Monde:

National Rally may not secure parliamentary majority in France

We should avoid getting too much into the weeds of the French system; it seems Marine Le Pen’s RN are looking at 260 seats as a worst-case scenario, which would not be enough for a majority, but it would take an unlikely, unholy and entirely unsustainable alliance of centrists and leftists to keep them out. The smart money here may be on an RN government – Le Pen says she would seek allies in the parliament should RN come up a few seats short of the 289 needed for an outright majority.

We discuss this in Thursday’s upcoming edition of the Overleveraged podcast.

Anyway, the “hung parliament is bullish” argument lasted about as long as the ludicrous “Macron is a political genius in calling the snap election” argument. The EURUSD gap closed — the euro is currently trading at $1.0716 against the greenback (down 0.23% on the day).

CAC 40 index and DAX fall ahead of Eurozone inflation data release

The CAC 40 index was also in giveback mode. It rallied 1% yesterday but had been up as much as 2.5% earlier in the session. This morning it retreated almost 1% in lockstep with the DAX as European shares were generally offered ahead of Eurozone inflation data.  

Philip Lane, chief economist at the European Central Bank, got the memo early and said June Eurozone inflation seems in line with the bank’s assessment. After ticking up in May, headline annual inflation in the Eurozone is seen declining to 2.5% from 2.6% in May, whilst core annual inflation is expected at 2.8%, down from 2.9% in May.

Franco-German bond spreads have not come in much:

UK general election: Labour may not perform as well as polls suggest  

And there is the UK general election on Thursday. Labour may not do as well as the polls suggest. Anecdotal evidence comes with the usual caveat emptor but should not be discounted — no one so far has come up to me and said they are backing Labour. Others I know have said the same. Maybe in-group bias is to blame? But the names I hear are Reform, Lib Dem and Green. Ironically, that could hand the larger of the two parties an even bigger share of MPs.

Whatever form of Labour government we get, I don’t think people are really attuned to just how radical some of its economic policies might be.  

Sterling is at its lowest in about two months. GBP to USD is at $1.2634 at the time of writing. Sterling has shed 0.13% against the greenback as of 09:45 GMT.