ClockWise: A big few weeks in Europe have begun

With the beginning of the Euros football championship over the weekend, many interested fans had already planned to keep their eyes firmly fixed on Europe and tournament heavyweight France for the coming weeks.

The surprise call of snap elections later this month from President Macron, however, has ensured that investors’ eyes will be locked on the region as well.

Political uncertainty has risen sharply in anticipation of the elections, with early polling suggesting that Macron’s party look set for a heavy defeat at the hands of Marine Le Pen’s National Rally party. With much doubt around the result and potential policy implications, French assets have suffered – with the French stock market losing all of this year’s gains to close last week in negative year-to-date territory. This loss in value has also seen Paris lose its place as Europe’s largest equity market, with London now taking the title.

There has also been a sharp reaction in bond markets. The spread between 10-year French Government bonds (OATs) and 10-year German bunds has risen to the highest level since November 2012 (Chart 1), in the largest weekly increase since late 2011 during the euro crisis, and during German reunification in August 1990. The market reaction has also seen French borrowing costs rising above Portugal for the first time in over 20 years.

The risk has spread broadly across wider European assets, with European stocks suffering their worst week in over a year and the euro depreciating sharply versus other currencies.

Chart 1: Markets viewing greater risk in France, the difference between French and German Bond Yields has risen

Source: LSEG Datastream as at 17/06/2024

However, while this political uncertainty has caused a sell-off and flight to safety in Europe, it is interesting to note that global equity markets still managed to record gains last week. Strong performance from US stocks continues to lift global indices as S&P 500 shrugs off French political risk. In fact, our measure of global investor sentiment has now moved close to overly positive territory, with stock market momentum improving and retail investors remaining bullish (Chart 2).

Chart 2: Global equities continue to rise and investor sentiment is bullish at the global level

Source: LSEG Datastream as at 14/06/2024

At this moment, we maintain a more positive outlook on the US regional equities, which continue to benefit from strong earnings trends and bullish sentiment around the AI and the US technology sector. Our outlook for European assets has been negative for some time now; earnings trends on the continent have been weak in comparison to the US. Now with heightened political uncertainty with France our outlook for the region remains pessimistic.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.