(Bloomberg) -- Investors expressed relief that Michel Barnier was appointed as France’s next prime minister, ending a period of political deadlock that allows the government to focus on fixing the nation’s finances again.
French stocks pared some losses and bonds outperformed German equivalents, briefly driving the 10-year yield spread below 70 basis points for the first time since July, after President Emmanuel Macron announced that Barnier — the former the EU’s former Brexit negotiator — would take the post.
France was plunged into political turmoil in June, when Macron called a snap election that ended in a hung parliament — with no party commanding the majority required to govern alone. For investors, it meant that any progress in tackling the government’s swelling deficit would have to be put on hold, spurring a violent selloff.
“The fact that there is an appointment means they at least now have a chance of putting a budget together,” said Gareth Hill, portfolio manager at Royal London Asset Management. According to French law, the government has to adopt a budget for 2025 in the coming weeks.
“However, the big question is how long he will last and to what extent a stable government can be formed,” Hill added.
Here’s what other investors and analysts are saying:
Christoph Rieger, head of rates strategy at Commerzbank:
- “Markets will probably be relieved by prospects that France could finally find a new government after all. But not having seen or heard much of Barnier since Brexit, we will wait to see what he stands for, and if he can survive no confidence votes without major concessions to the left”
Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management:
- “The real issue in France is public spending going out of control and the new prime minister’s ability to tackle this. Markets are somewhat reassured to get a new prime minister from the mainstream but this doesn’t solve the key issue. One could say it’s a non event as it won’t by itself reduce the discount on French equities”
Pooja Kumra, head European rates strategist at the Toronto Dominion Bank:
- “Markets are generally happy with a neutral centrist figure like Barnier”
- “But the problem to passing legislation, and the budget rules still will remain a pain given the tri-party composition of the government. This means that it is hard to see the spread between OATs and bunds compressing beyond 60 basis points”
Valentin Marinov, head of G10 FX research and strategy at Credit Agricole:
- “I guess some uncertainty would linger especially with regard to how much support the Barnier caretaker government and its future budget proposal would garner in the National Assembly. Furthermore, it remains to be seen if any party would launch a no-confidence motion”
- “All that said, what the latest developments could result to would be to relegate the political drama in France to more of a secondary EUR-driver in the eyes of FX investors. EUR/USD thus would continue to follow closely the EUR-USD short term rate differential”
Gilles Guibout, a Paris-based portfolio manager at Axa IM:
- “Barnier, that’s a name which is likely to reassure markets in the short term but this doesn’t solve the underlying issue”
- “In itself, this does not constitute a reason to buy or to sell anything”
- “In order to be reassured, one would need a satisfying vote on the budget”
Alex Everett, investment manager at Abrdn Investment Management Ltd.:
- “To me, this seems a sticking plaster appointment which doesn’t resolve France’s long term fiscal issues. Macron has appointed a ‘safe’ and experienced pair of hands to keep the wheels of government spinning, and importantly someone who is at least loosely on side with Macron’s agenda”
- “Barnier has a major challenge ahead. He must find sufficient consensus to get a budget through which reduces the French debt-load while encouraging future growth. The stakes are high, and risk of failure is similarly high given the scope for political challenges. To that end, we would oppose any short-term OAT-Bund tightening, and are comfortable remaining short France on spread”
Andrea Tueni, head of sales trading at Saxo Banque France:
- “The CAC 40 is making its peace with the fact that French politics will remain complicated in the near future. At the moment I don’t see any reason for Paris to catch up with the other European stock markets just because we have a new PM, given France’s current budgetary situation”
Alexandre Hezez, chief investment officer at Group Richelieu:
- “The market is still in a wait-and-see mode and is not adding any risk”
- “There is no reason for the risk discount of French assets to go lower. The risk premium remains because the reforms wanted by rating agencies and investors will be difficult to implement”
--With assistance from James Hirai and Alice Gledhill.
(Updates with strategists’ comments, chart, context.)
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