France’s Cac 40 up 1.5%; euro gains 0.5% against US dollar
France’s Cac 40 index has moderated somewhat: the index is now up by 1.5%.
That is still a notable move, but less than the nearly 3% surge earlier.
The euro is up by 0.5% today against the US dollar at $1.0766. A hung parliament would make it more difficult for either the far-right National Rally (RN) or the leftwing New Popular Front coalition to win a majority and increase spending. Some economists fear that a spending spree could prompt investors to dump French assets.
The chart below is what the pre-election move looked like in the bond markets. The yield on French bonds (which moves inversely to prices) had risen to a seven-month high before the election.
The gap between the yield on French and German debt had also soared, although it closed after the slightly lower than expected vote share for the RN over the weekend. Via Reuters:
The spread between French and German 10-year sovereign bond yields a gauge for the risk premium investors demand to hold French bonds – tightened to 73 basis points (bps), after hitting 85.2 on Friday, its highest level since July 2012. It was less than 50 bps the days before Macron called for snap elections.
However, even if the spread narrowed, the yield on French 10-year debt still rose to its highest since November. The yield hit a high of 3.334% on Monday, up from 3.135 before French President Emmanuel Macron called the election on 9 June.
Key events
There has been a rush of manufacturing data today. The UK’s purchasing managers’ index (PMI) from S&P Global suggests it is doing better than Europe.
The PMI reading came in at 50.9 in June, still well into expansionary territory, in contrast to the two-year contraction in Europe. The reading was worse than the initial flash estimate of 51.4, and down slightly from May’s 22-month high of 51.2.
Rob Dobson, director at S&P Global Market Intelligence, said:
The UK manufacturing sector is enjoying its strongest spell of growth for over two years, with June seeing output and new order growth sustained at robust rates similar to May’s recent highs. The performance of the domestic market remains a real positive, providing a ripe source of new contract wins. In contrast, the ongoing weak export performance is concerning, with manufacturers reporting difficulties in securing new business in several key markets including the US, China and mainland Europe.
However, that did not stop companies from making job and spending cuts and trying to run down inventories of unsold products, Dobson said. Inflation may be partly behind that:
This is coming from a backdrop of renewed cost inflation pressure, with manufacturers’ input prices now rising at the quickest pace since the start of 2023. This renewed upward lurch in manufacturing prices will likely add to concerns over the potential stubbornness of underlying inflationary pressures among hawkish rate setters at the Bank of England.
It’s a big news day for what remains of Northern Irish manufacturing: first, we had the news that Airbus will take over the historic Shorts aerospace operation from Spirit Aerosystems. And now there are renewed questions over the future of the nearby Harland & Wolff site, after its shares were suspended on the London’s junior stock market.
It has been forced to temporarily suspend trading in its shares after accounting issues meant it was unable to file audited accounts on time, the Guardian’s Jack Simpson reports.
It expects to publish the accounts in the week commencing 8 July, with share trading resuming at that point.
The Belfast-based shipbuilder was plunged into uncertainty last month when it was reported that the UK government was witholding the approval of a £200m loan guarantee promised in December to shore up its finances.
You can read the full report here:
France’s Cac 40 up 1.5%; euro gains 0.5% against US dollar
France’s Cac 40 index has moderated somewhat: the index is now up by 1.5%.
That is still a notable move, but less than the nearly 3% surge earlier.
The euro is up by 0.5% today against the US dollar at $1.0766. A hung parliament would make it more difficult for either the far-right National Rally (RN) or the leftwing New Popular Front coalition to win a majority and increase spending. Some economists fear that a spending spree could prompt investors to dump French assets.
The chart below is what the pre-election move looked like in the bond markets. The yield on French bonds (which moves inversely to prices) had risen to a seven-month high before the election.
The gap between the yield on French and German debt had also soared, although it closed after the slightly lower than expected vote share for the RN over the weekend. Via Reuters:
The spread between French and German 10-year sovereign bond yields a gauge for the risk premium investors demand to hold French bonds – tightened to 73 basis points (bps), after hitting 85.2 on Friday, its highest level since July 2012. It was less than 50 bps the days before Macron called for snap elections.
However, even if the spread narrowed, the yield on French 10-year debt still rose to its highest since November. The yield hit a high of 3.334% on Monday, up from 3.135 before French President Emmanuel Macron called the election on 9 June.
On the French election, Swiss investment bank UBS said there is uncertainty over what will happen in the second round because of 250+ “triangular votes”, with second rounds contested by three candidates.
But the UBS analysts, led by Claudia Panseri, chief investment officer at UBS Wealth Management France, say that “the probability that no majority emerges from the election appears significant”. (And on that basis they tell investors to avoid overreaction in the coming days.)
The reach of the French far right will depend in part on whether other parties work together to stop them, UBS said:
By 6pm on 2 July, the candidates will need to confirm if they want to enter the second round or withdraw and lend their support to another candidate. It will also be important to see whether the various parties will give explicit guidance to their voters on which candidate to vote for in the second round in constituencies where their own candidate fared less well. Gabriel Attal, France’s prime minister, has called on members of his party who came in third to withdraw in favor of a “candidate who defends the values of the Republic”. For now, the left is calling on its third-placed candidates to withdraw in order to defeat the RN.
But either way, a “period of political instability” is very likely, they write in a note to clients.
France’s main stock index may have gained this morning, but UBS is cautious about the implications for company share prices, because uncertainty will be the name of the game for at least a week, and possibly longer. They wrote:
The poor showing by Macron’s Ensemble alliance in the first round is likely to mean that French and Eurozone equities struggle to recover some of their recent losses. […]
Fiscal worries will also likely remain until there is greater clarity after round two, preventing a larger rebound in stocks vulnerable to fiscal worries, such as financials and defense stocks. We expect European markets to stay volatile given there is still elevated uncertainty heading into the second round.
UK mortgage approvals dipped slightly in May, but were right in line with expectations, according to new data from the Bank of England.
Net mortgage approvals for house purchases fell from 60,800 in April to 60,000 in May, while approvals for remortgaging decreased slightly from 29,900 to 29,600 over the same period, the Bank said.
Holger Schmieding, chief economist at Berenberg, a German investment bank, said the French election result was “not worse than expected”.
Marine Le Pen’s National Rally (RN) and its allies received 33% of the national popular vote, with the leftwing New Popular Front in second with 28%. President Emmanuel Macron’s centrist bloc was third on 20% of the vote.
Schmieding said RN’s vote share was two points below opinion polling, meaning “a hung parliament remains the most likely outcome”. RN could still win an absolute majority in the second round on Sunday 7 July, but that “now looks even slightly less likely than it did before”, he wrote in a note to clients.
He also noted that the possibility that the leftwing coalition could “take power and implement its costly agenda seems to have receded further”. (Investors have generally not been in favour of the potentially free-spending leftwing coalition.)
Schmieding sketches out three scenarios (quoted here in full):
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Gridlock: The most likely outcome remains a hung parliament in which neither the far right nor the united left nor the Macron’s centrists can muster a majority. In this case, any (new) government would not get much done.
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Worse than gridlock: Although the united left and RN are polar opposites on issues of migration, culture and identity, they have all opposed Macron’s pro-growth reforms. As a result, we see a risk that Le Pen’s party and parts of the left may still join forces in a hung parliament on a few select issues to soften Macron’s pension reform and enhance the “purchasing power” of citizens, for instance through lower VAT on energy products or via additional subsidies.
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Marine Meloni: With a significantly lower probability than the first two scenarios, Le Pen’s party may still win a majority of seats and install RN boss Jordan Bardella as prime minister. If so, she would probably focus on winning the 2027 presidential election, staying on the more moderate track which she has signalled during the campaign. She may concentrate on some signature policies (e.g. being tough on immigration) rather than on expensive or disruptive fiscal promises. Put differently, Le Pen may try to largely follow the example of Italy’s prime minister Giorgia Meloni. To do so, she may possibly explain to RN voters after a lengthy fiscal review that most of her original fiscal ideas could only be implemented slowly over time – or only if she became president in 2027.
Schmieding sees “a change for the worse” after Macron’s “pro-growth economic reforms”. He thinks they will mean higher spending relative to government income, plus a much more combative relationship with the EU.
Back on the French election fall-out, let’s look at what economists have had to say this morning.
Marine Le Pen, leader of the victorious National Rally, formerly called for France to leave the euro currency and the EU. She has done her best to distance herself from any anti-euro sentiments in recent times, realising they are unpopular with people whose savings are in euros, but concerns over the future of Europe have been a major part of investor concerns over a far-right government.
A hung parliament – as indicated by the first round of voting – would assuage some of those concerns. However, it could also stop Macron from making changes such as pension reforms that might boost economic growth, but which have proven unpopular with voters.
Mohit Kumar, chief economist of Jefferies investment bank, said:
The result is probably better-than-feared, but not as good as the status three weeks ago pre-elections.
We could still be looking at the next few years of political paralysis in France with a stalling of the reform process. However, any fears of Frexit or a euro area breakup would be unfounded.
Two-year recession for European manufacturing sector
Output from Europe’s manufacturing sector dropped in June as Germany’s economy continued to struggle, according to a closely followed index. That marked two years of contraction for the sector.
The purchasing managers’ index (PMI) for the eurozone dropped from 47.3 points in May to 45.8 in June, according to S&P Global.
Germany’s enormous manufacturing sector is usually the powerhouse of Europe, but it has now been in contractionary territory for two years, according to the PMI reading.
The latest Germany reading for June came in at 43.5, a marked drop from May’s 45.4 reading. That was marginally better than expectations, but remains well below the 50-point mark that denotes expansion.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said:
We are inclined to see this more as a temporary blip rather than a sign of a prolonged downturn. Manufacturing growth was seen in other parts of the world in June, such as the United States, UK, and India, according to their respective Flash PMI. This global recovery provides a supportive backdrop for Eurozone manufacturers.
Additionally, optimism about future production remains as high as it was in May, indicating that businesses are still confident about the coming year.
UK house price rises pick up pace slightly in June
UK house prices rose by 1.5% in the year to June, a slight acceleration compared to 1.3% in the year to May, according to lender Nationwide.
During June prices rose by 0.2% to an average of £266,604.
The relatively slow pace of increases – certainly compared to the run of the last decade – is mostly down to higher interest rates, according to Robert Gardner, Nationwide’s chief economist. He said:
Housing market activity has been broadly flat over the last year, with the total number of transactions down by around 15% compared with 2019 levels. Transactions involving a mortgage are down even more (nearly 25%), reflecting the impact of higher borrowing costs. By contrast, the volume of cash transactions is actually around 5% above pre-pandemic levels.
While earnings growth has been much stronger than house price growth in recent years, this hasn’t been enough to offset the impact of higher mortgage rates, which are still well above the record lows prevailing in 2021 in the wake of the pandemic.
The biggest price increases were in Northern Ireland, up 4.1% compared with the second quarter of 2023. Across England overall, prices were up 0.6% year-on-year, while Wales and Scotland both saw a 1.4% year-on-year rise.
Prices fell 0.3% across southern England in the second quarter compared to a year earlier.
Boeing buys supplier Spirit, with Airbus to gain $559m from deal
Boeing has bought supplier Spirit Aerosystems for $4.7bn, reversing a move 19 years ago to spin out the fuselage manufacturer.
The US planemaker is taking control of Spirit in response to a series of manufacturing issues – including a blown-out door panel in January – that have plunged it back into crisis mode just as it thought it was emerging from the shadow of two crashes of its bestselling 737 Max jet.
It may not be listed in France, but Toulouse-headquartered Airbus is another big gainer on stock markets this morning. The Amsterdam-listed planemaker may be benefiting from the broader rally, but its shares are up 2.8% after it said it will gain $559m (£441m) in compensation.
Airbus will take over manufacturer of fuselage sections for the A350 jet in Kinston, North Carolina, and St Nazaire, France, A220 pylons in Wichita, Kansas, and of the A220’s wings and mid-fuselage in Belfast, Northern Ireland, and Casablanca, Morocco.
Boeing chief executive Dave Calhoun, who retires later this year, said:
We believe this deal is in the best interest of the flying public, our airline customers, the employees of Spirit and Boeing, our shareholders and the country more broadly.
By reintegrating Spirit, we can fully align our commercial production systems, including our safety and quality management systems, and our workforce to the same priorities, incentives and outcomes – centered on safety and quality.
French banks are leading the gains on the Cac 40 index in early trading, as investors predict a hung parliament following the first round of parliamentary elections.
The share price of every company in the French benchmark index has risen so far today.
Société Générale is the top gainer, up 6.4%, with Crédit Agricole and BNP Paribas both up 4.8%.
French airports and construction company Vinci, which has a large number of government contracts, is up 4.9%. Energy utility Engie and waste and water company Veolia have risen 4.5% and 3.7% respectively.
The FTSE 100 in London has also gained in the first few minutes of trading.
It is up 0.6%. The biggest riser is property investment trust Landsec, up 3%, followed by energy company Centrica, up 2.4%.
France’s Cac 40 index surges 2.6% in early trades
European stock markets are up across the board after the French election result.
They are led by the Cac 40, France’s benchmark, which has surged by 2.6% at the opening bell.
Spain’s Ibex is up 1.5%, Italy’s FTSE MIB is up 1.8% and the Europe-wide Euro Stoxx 600 index has gained 1%. Despite more expected signs of weak economic growth, even Germany’s Dax has edged up by 0.2%.
Euro hits two-week high after first round of France election
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
France’s far-right has won the first round of the country’s two-stage parliamentary elections, in a result that suggests it could be the largest party for the first time since the second world war. It is a seismic political result for Marine Le Pen’s National Rally, but financial markets have remained relatively steady as investors look to the prospect of a hung parliament.
Analysts at Deutsche Bank led by Jim Reid wrote:
The first round of the French elections perhaps delivered a slightly less convincing victory for the far-right than final polls suggested and with other parties now seemingly open to form alliances in the second round, this is likely to further reduce the far-right’s chance of an overall majority in parliament.
A hung parliament would make it very difficult for any single party to push through a legislative agenda – particularly given the main left- and rightwing parties’ cordon sanitaire against working with the far right.
Here is a round-up of the different movements on Europe’s financial markets so far:
The euro has gained against the US dollar. The single currency rose by 0.55% to $1.0771, after hitting its highest level in more than two weeks.
The difference in yield between French and German bonds (AKA the spread) is generally seen as a key measure of risk appetite from investors. On the evidence of this morning, they are hopeful that a hung parliament could reduce any chance of a radical economic agenda in the next few years.
The below chart shows how the spread has narrowed from 79 basis points (0.79 percentage points) to 73 basis points. That comes after the spread surge since 10 June, when markets responded to Macron’s shock decision to call a snap poll.
Futures for the Cac 40 suggest France’s benchmark share index will surge by 3% when it opens at 8am BST. The index on Friday hit its lowest level since January.
The agenda
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8:55am BST: Germany HCOB manufacturing purchasing managers’ index (PMI) (June; previous: 45.4 points; consensus: 43.4)
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9am BST: Eurozone HCOB manufacturing PMI (June; prev.: 47.3; cons: 45.6)
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9:30am BST: Bank of England mortgage approvals (May; prev.: 61,140; cons.: 61,000)
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9:30am BST: UK S&P manufacturing PMI (June; prev.: 51.2; cons.: 51.4)
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1pm BST: Germany inflation (June, prev.: 61,140; cons.: 61,000)
