Election Season Continues

France heads to the polls
On June 30 and July 7, the French public will vote to elect their members of Parliament. There are 577 seats up for grabs, so a party needs 289 seats to have an outright majority to govern. Anything less, in general, would mean that parties may try to work together to form a coalition. This has been the case since 2022 with President Macron, as his party does not have an outright majority in Parliament. But this time it seems slightly different. Alliances have already been made, and a reconciliation between parties is hard to view given how different economic, social, societal, and geopolitical policies are.

What does this mean for markets? We can expect market volatility around the two rounds of the election given the uncertainty. French government bonds are the most exposed to the unfolding of events given the (moderate) fiscal uncertainty. In equities, the French CAC 40 index is currently finding support on levels it could rebound from, after correcting by around 10% since the European election. But, if uncertainty were to remain elevated, we could see French stocks underperforming their European peers in any rebound. This week, the debate between candidates of the tree main parties / alliances (Tuesday) could move opinion polls ahead of the vote on Sunday.

In our flagship portfolios, we remain diversified across markets, with a slight equity overweight
A fragmented world along (geo)political lines, which could create volatility, remains one of our core theses. As such, at the beginning of the year, we added a range of diversifiers into our flagship portfolios, such as broad commodities. We also added an equity ‘insurance’ instrument, both in our flagship portfolios and those where client knowledge and experience, and regulations, permit. Such an instrument partially protects against certain drawdown scenarios in equity markets, which we have witnessed over the past two weeks when European stocks fell in the wake of the results of the European elections.

The Eurozone recovery has moderated slightly, but remains on track
After digesting the recent political events, European assets rebounded last week. Business and consumer confidence has improved in recent months as growth improved in the first quarter in Europe. The release of the June purchasing managers’ indices (PMIs) showed that the upward growth trend is moderating, but we don’t believe this is a reason to worry. The drop was mostly due to a fall in manufacturing activity, which continues to contract. Services growth also slowed slightly. That said, the composite reading is still growing in line with our forecast of gradual economic recovery. In addition, price pressures have eased further, meaning that additional European Central Bank (ECB) rate cuts are likely this year, which are going to be a renewed tailwind for investment, credit, and consumption. This Friday, inflation readings in France, Italy and Spain will likely support this view.

A rate cut in the UK looks increasingly likely in the summer
Inflation has fallen back to the Bank of England’s (BoE) target of 2% for the first time in three years. However, services inflation was higher than expected. The BoE’s statement revealed that this was mostly due to volatility related to annual price increases at the start of the fiscal year (April). Markets are now giving around a 50% chance of a 0.25 percentage-point rate cut at the BoE’s next meeting on August 1st, which we also think is likely. We believe the BoE could then follow up with an additional cut before the end of the year. Markets rebounded following the inflation reading, with the FTSE 100 equity index rising around 1.5%. Gilt yields fell modestly, and pound sterling ended moderately lower.

US equities continue to hit new highs, watching political debates
Last week, US equities closed at record-high levels again and, as a side note, Nvidia dethroned Microsoft as the most valuable stock in the US. US equities remains our largest absolute exposure within equities, as we aim to capture artificial intelligence and growth & innovation themes more generally. Robust growth and upcoming Fed rate cuts are still tailwinds for US stocks. After May’s inflation was better than expected, the US Federal Reserve’s (Fed’s) favourite measure of inflation, the personal consumption expenditure index (Friday), is expected to slow, too, to just above 2.5% in both the headline measure and the core one, which strips out volatile components such as energy and food. We could be nearing a level at which the Fed could start to consider lowering interest rates in September. Before that, like in France, the debate between Biden and Trump (Thursday) could move opinion polls, and perhaps markets, though the road to the November election could be bumpy.