The Le Pen impact on European stock markets

After the expected decision of the ECB on June 6 that cut interest rates by 0.25 basis points and, assuming that the US Fed was not going to do anything this week, the financial markets were already pricing in an early start to the summer. After the decisions of the central banks, until the presentation of business results for the second quarter, well into July, more than a month of tranquility was foreseen before the almost always volatile August. But the European elections were missing. We already warned that certain actions could be influenced by something because there are several corporate operations pending political authorizations.

This has been the case in Spain with Naturgy, which has plummeted on the stock market this week due to the withdrawal of the planned Qatari takeover bid. What we did not expect is the political earthquake that the electoral result (a great victory of the National Front) such as President Macron’s quick reaction by urgently calling early elections.

However, perhaps what could have had the most weight after these two events was the decision of the leader of the Republican Party (heir to the former presidents Charles de Gaulle and Jacques Chirac and refounded by Nicolas Sarkozy in 2015; the PP there to understand each other, although in very low hours) to agree with the National Front. And this has a great impact because the National Front has had very good electoral results for many years (already obtained by the father of Marine Le Pen) but its candidate never had a chance to become president of the country. Faced with the situation of choosing between the FN and the other candidate (whether from the right or from the moderate left), the majority of the vote leaned towards the one other than Le Pen. This alliance broke that “wall” and therefore, if, as the polls say, the right wins the elections (June 30 first round, July 7 second) it would not only control the majority of the Chamber but Le Pen would be the favorite to the next presidential elections. Finally, the Republican Party rejected its leader’s decision but the step has already been taken.

There is a fear that the second European economy will be presided over by someone who on many occasions has been against the EU and, especially, the current architecture of the Eurozone.

The presidential elections are not held until 2027 (in which Macron cannot run, perhaps that is why his decisions are more visceral and less strategic) but the difficult cohabitation could lead Macron (whose “centrist” party had half the support of the of Le Pen in the European elections) to resign and call elections, and that worries investors. And not because of ideological issues, it is above all because of the fear that the second European economy is presided over by someone who on many occasions has been against the EU and, especially, the current architecture of the Eurozone. The ghost of “Frexit” provokes suspicion, even the French risk premium skyrocketed. Given this, several things must be pointed out. The first thing is that the French electoral system is different from that of the European ones, France allocates seats to whoever obtains the most votes in each constituency and not based on a proportion of the total vote in the entire country. Whoever does not achieve victory by more than 50% has to fight in a second round. Macron will know something to have called elections, it is strange that he would have done it if he was sure that he was going to lose them. And in any case, even if the result of the European elections were repeated and the National Front obtained a majority, it is not certain that Macron would not try to cohabit. And even if there were finally presidential elections and Le Pen won them, which are already many assumptions in a row, it is not so clear that he is not going to try to reform the EU and the Eurozone without wanting to break it as some fear.

The possible consequences that Macron’s decision to advance the legislative elections could have is having (and could have more) an effect because the European stock markets are inflated

Sometimes things happen that almost no one expects, like the bankruptcy of the Credit Suisse last year, and its influence on the markets is much less than feared. It is true that a France led by Le Pen, and with trump in the White House, it is a worrying factor for investors who are generally conservative and tend to be suspicious of changes. It is true that the scenario could change drastically, but I think what is really scary is the unreal valuation levels of some stock indices. That is to say, the possible consequences that Macron’s decision to advance the legislative elections could have are having (and could have more) an effect because the European stock markets are inflated.

Our economic area is growing little, it still has a problem with inflation, interest rates remain high (which represents a great financial burden for companies, public administrations and consumers with a mortgage); several countries with unsustainable public debt that they can renew without problems only thanks to the generosity of others; adverse geopolitics (two war scenarios); a commercial pulse with the United States and China; It is lagging behind in technological innovations, so its productivity is lower than that of its rivals; hyperregulation that paralyzes your decision mechanisms; population aging that leads to necessary immigration but a source of tensions, etc…

A necessary correction

The euphoria of the European stock markets, even though some analysts defend that “they are cheap” in relation to Wall Street (bubbled in turn by four large-cap stocks), well deserves a notable summer correction, with or without French elections. And it wouldn’t be so dramatic either considering that before the Europeans the Euro Stoxx (index of leading European companies) had a revaluation of 12% in 2024 without including dividends paid.