In a snap: what French elections have to do with the US Markets
In a snap: what French elections have to do with the US Markets
In life, expectations are everything.
Like when someone tells you who’s coming to a party beforehand, you can get a sense of what to expect. There’s comfort in the knowing. But if something out of the blue happens, like an ex-partner shows up, anxiety levels can rise.
Last week was one of those times for the global markets and the state of geopolitics. On Sunday, June 9, France’s current President Macron announced a surprise snap election, after his centrist alliance was outvoted by opponent Marine Le Pen’s far-right movement, in a parliamentary vote.
On the surface, it might seem unimportant here in the US. But there are reasons many are now watching what happens:
A victory by LePen’s party is drawing concern for greater government spending in France, causing interest rates there to move higher—even relative to Germany’s—and dropped French stock values. Since then, there have been several European companies pulling back on projects and even one deciding to not go public.
This also supported the opposite effect on 10 year US treasury rates in the last week. As it often happens when anxiety levels rise, capital is moved to “safety” in US treasuries. Greater demand for treasuries causes bond prices to rise and, thus, US interest rates to fall since the announcement. In turn, this helped lift US markets higher.
It leads to wondering what a US political surprise could mean—such as a full party sweep by either party—potentially introducing more spending at a time when fiscal conservatism is necessary. After all, for better or worse, a split government likely has lower risk of greater spending.
The CBO update came out Tuesday afternoon and it showed an even worse longer term financial deficit than the last update—-reinforcing that US spending needs to be fixed.
If that doesn’t begin to happen, the knock-on effect of anxiety can lead to less capital expenditures from companies both abroad and here, leading to an eventual slowdown in economic growth.
Looking ahead, the pesky debt ceiling suspension ends on December 31, 2024 and 2017 tax cuts mostly expire at the end of 2025. So while I don’t see it impacting the rest of this year as much, the debt issue will likely be something that comes back up in the next year.