Market Update: Political headwinds are not new for French assets, as the country is looking for another PM

Highlights: France is facing a new wave of political uncertainty as Francois Bayrou lost the confidence vote and President Macron is back in the search for another Prime Minister (PM). Schedules are tight for the country to approve a fiscal budget, while upcoming credit rating decisions could add further pressures. We continue to prefer EUR IG bonds over sovereign debt and have a neutral view on French equities. Beyond near-term noise, we believe EUR might benefit from narrowing interest rate differentials and international investor demand.

• French PM Bayrou lost a vote of confidence, even from some members of his own coalition, and was pushed to resign. Between calling for a new snap election, or appointing a new PM for a fifth time in the last two years, President Macron opted to do the latter
• The path forward is unclear, as the selection of a candidate from any political space entails drawbacks, and the new government will be pressed to submit a budget before 7th October. We are not confident the appointment alone will lead to a passing of the budget or a lasting political solution, and thus cannot rule out a snap legislative election in the coming months
• Until then, the current government remains in care-taker duty, and the 2025 measures could be extended temporarily into 2026, keeping fiscal discipline and progress at risk
• French assets were little changed during Tuesday trading, as the expectation of the government failing was already priced in. Markets were relieved that Macron didn’t opt for the snap elections scenario which would fuel further uncertainty and another reshuffling in the National Assembly amid the fragile political dynamics
• Within the Eurozone bond space, we continue to prefer investment grade credit over sovereign debt. Beyond any near-term reaction to renewed political uncertainty shocks, we believe EUR will eventually resume its upward trend on the back of narrowing interest rate differentials and the region’s appeal for international investors looking to diversify currency exposure. We have a positive view on EUR while remaining neutral on French equities