The financial markets are in turmoil as concerns over political instability in France escalate. European stocks are on track for their worst week in months, and US equity futures are weakening. Investors are seeking out haven assets amidst the uncertainty.
According to Mohit Kumar, chief economist for Europe at Jefferies International, the current risk-off tone in the markets is driven by concerns over France. French President Emmanuel Macron’s announcement of a snap legislative election following his party’s poor performance in the European Parliament elections has heightened anxiety among investors. The possibility of Marine Le Pen’s far-right National Rally party winning the election and implementing looser fiscal policies has further fueled market concerns.
The uncertainty surrounding the French election has led to a surge in the premium France pays on its bonds relative to Germany. The yield on two-year German debt, considered the safest European sovereign, is set for its biggest drop since May 2023. This situation has drawn comparisons to the sovereign debt crisis, with analysts warning of continued volatility until the French vote is concluded next month.
Despite the current market weakness, Beata Manthey, head of European equity strategy at Citigroup Inc., points out that the underlying European earnings and economy are strengthening. In the US, Adobe Inc. shares are projected to post their biggest gain in four years, while Tesla Inc. investors approved Elon Musk’s compensation package and the company’s move to Texas.
In Asia, the Bank of Japan’s decision to postpone details on its bond buying reduction until July has left the yen vulnerable to further declines. However, Hiromi Ishihara, head of equity investment at Amundi Japan, believes that the BOJ is likely to make further moves later this year despite the potential impact on overseas investors.
Overall market movements include declines in S&P 500, Nasdaq 100, and Dow Jones Industrial Average futures, along with a fall in the Stoxx Europe 600 and the MSCI World Index. The Bloomberg Dollar Spot Index has risen, while the euro and British pound have weakened. Bitcoin and Ether have seen price increases, and yields on 10-year Treasuries, German bonds, and UK bonds have declined. WTI crude and spot gold prices have also experienced fluctuations.
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