17/06/2024

The results of last weekend's European elections appeared to be largely in line with the polls: The European Parliament has swung to the right, especially towards nationalist, Eurosceptic and populist right-wing parties. For their part, the centrist party, the Greens and the Left in general performed worse than in 2019. However, given that the party of the current president of the European Commission continued to be the most voted party, profound political changes seemed unlikely.

However, the earthquake came when, in response to the poor performance of his political group at the expense of Marine Le Pen's National Rally party, the French president called early parliamentary elections, to be held between 30 June and 7 July. Initial polls suggest both the possibility of a National Rally absolute majority and a hung parliament.

While there are signs that Le Pen's party has moderated some of its more controversial positions, such as pushing for a referendum to leave the eurozone, concerns remain about its stance on fiscal matters, especially as France is about to enter an excessive deficit procedure. A National Rally-led government could put the EU's new fiscal framework to the test, which was immediately reflected in the performance of the country's financial assets.

The political turbulence thus weighed on European equity markets, which experienced their worst week since September 2022 and fell by around 4%. The financial sector bore the brunt due to deteriorating debt markets in France and the periphery, or fears that a National Rally government could push for a bank tax and generally less fiscal discipline.

The industrial and discretionary consumer sectors were also very weak, in this case due to the European Commission's decision to increase tariffs on Chinese electric vehicles, which opens the door to trade retaliation from the Asian giant.

In the United States, the outlook was very different. Good inflation data for May pushed the SP 500 back up, which posted a 1.5% weekly gain, making four consecutive record highs before closing with marginal declines in last Friday's session.

Meanwhile, technology giants once again led the week on the US stock market. Both Nvidia and Apple recorded weekly increases of between 8 and 9 per cent, adding between them nearly $600 billion of market capitalization to the index, equivalent to the total capitalization of the Ibex 35.

In bond markets, US and German government bond yields eased sharply last week in response to softer than expected inflation in the United States and some signs of economic weakness on both sides of the Atlantic.

However, the most striking feature of the week was the sharp rise in peripheral risk premiums and the large increase in the yield spread between French and German bonds. The French risk premium widened by almost 30 basis points, the highest since 2017. In Spain, the risk premium widened by 21 basis points to 0.93%, while in Italy it rose by 23 basis points to 1.57%.

And what can we expect from the future? 

History shows that episodes of political instability tend to be short-lived in developed countries. Although the publication of polls and media reports in the coming weeks may keep volatility high, we believe that the French election results will not bring about a profound change in the governance of the eurozone.

Moreover, we believe that the diversification approach should continue to guide our positioning and we maintain a constructive view on global financial assets, which in the soft economic landing scenario we expect should remain reasonably well supported.