- Is the market underestimating the risk of a surprise outcome in the French elections? Unlike 2017 the delicate phase for investors lies between the first and second round. A significant repricing of the political risk premium could occur in case we see (i) a massive shift in second-round voting intentions against incumbent Emmanuel Macron and/or (ii) a risk of massive abstention.
- Our base-case scenario is a victory of incumbent Emmanuel Macron with a repeat of the 2017 contest against Marine Le Pen in the second round. We expect some temporary spread widening for French government bonds (OAT) between both rounds. However, a victory of an EU-sceptical candidate would carry longer lasting risks for both OAT and peripheral spreads.
- French government bonds’ semi-core status is not a given and will depend on France’s relative fiscal stance in the Eurozone. While the budget deficit doesn’t show noticeable improvement from the pre-Covid-19 years (-6.5% in 2021, -7% for in 2022) none of the candidates’ programs point to a consolidation course.