Investing.com – French stocks plummeted last week, falling a whopping 6% (their biggest weekly drop since March 2022) following the announcement of the dissolution of the National Assembly and the calling of new legislative elections.
In a note published this Monday, UBS (SIX:) addressed the issue, highlighting that the possibility of the far-right National Rally party winning the elections based on promises of public spending worries the markets and weighs on stocks and bonds.
The bank also noted that the spread between German and French 10-year bonds last week recorded its biggest weekly increase since late 2011, during the European debt crisis.
UBS analysts further highlighted that the outcome of the election is uncertain and outlined four possible scenarios to help investors better anticipate market reactions.
The most likely scenario envisaged is an absolute majority for the National Rally (RN), which would allow the party to name a prime minister and comfortably pass laws. UBS notes that, in this case, the party’s policies would focus on spending aimed at boosting purchasing power, financed by controlling immigration-related social spending.
In the second scenario considered by UBS, RN would obtain a relative majority in the National Assembly, leading to a complex cohabitation in which the president would appoint a prime minister from RN, leading to a political deadlock and, therefore, therefore, to limited changes.
The third scenario foresees that the left-wing Popular Front becomes the largest party in the National Assembly without obtaining an absolute majority. In this case, UBS also expects a political blockade, noting that the party has already indicated that it wants to reverse recent pension and employment reforms and increase spending on retirement and purchasing power.
In the last scenario described by UBS analysts, Macron’s party would manage to maintain a relative majority in the National Assembly, which would lead to continued difficulties in passing laws without alliances.
Finally, UBS specifies that, regardless of the scenario that develops, France’s fiscal situation is expected to remain difficult given EU rules, which will severely limit the Government’s room for maneuver, whatever it may be.
