02 July 2024
If you are covering the latest news in financial markets, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
“In what is a busy seven days for election news, culminating in the UK going to the polls on Thursday, markets appear ready to reflect the new political narrative in both the US and France, resulting in directionally opposite moves in bond markets.
“In France, there was a noticeable recovery in financial assets following the election results, which were taken to be an indication that a far-right majority was less likely than polls had earlier indicated. This saw the spread of yields on 10 year French bonds over 10 year German bonds – currently a reasonable indicator of the additional electoral risk – contracting 5.8bps and the CAC 40 finishing the day 1.09% higher after an initially stronger start. That this narrative can hold out through round two of voting next Sunday looks unlikely. However, some comfort has been taken from the limited impact, at least from an economic standpoint, that the Rassemblement National could ultimately have.
“The French fiscal deficit currently stands at 5.5% of GDP and has already triggered an EU-level intervention, given fiscal rules state the imbalance shouldn’t be over 3%. Despite initially touting big-ticket populist policies, in recent weeks there has been significant back pedalling to reflect the reality of already over-stretched budgets, with assurances to respect existing EU fiscal rules and bring down deficits. Whether this comes at the cost of appeasing RN voters with more stringent reforms in areas such as immigration, remains to be seen.
“Across the Atlantic, markets have moved to price in a significantly higher likelihood of a Trump victory in the November Presidential election, seeing Treasury bond yields rise as a result of the potentially inflationary impact of his policies. With said policies unclear and likely to remain so until enacted, markets are second-guessing the potential for tax cuts, deregulation and a Trump-friendly Fed Chair. While this US election campaign may be far from over, the ultimate impact of a Trump second term is considerably uncertain, but what is clear is that inflation has behaved in a way that not even the Federal Reserve was able to predict. Whether markets – at this early stage - have now got it right, seems unlikely. This remains a year for humility, not only in recognising the limitations of polls, but also on the scope for political candidates to upend the economic status quo at a time when the fiscal constraints have rarely been tighter.”
