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Markets Weekly podcast – 8 July 2024
What could French and UK election results mean for markets?
08 July 2024
Tune in as host Julien Lafargue gives us the lowdown on the results from the French and UK elections. Amongst other things, he explores France’s parliamentary split and the implications for the region’s budget in 2025. Turning his attention to the global economy, Julien also covers the latest manufacturing and employment data from the US.
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Julien Lafargue: Welcome to a new edition of Barclays’ Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist at Barclays Private Bank, and I will be your host today, as Henk is enjoying well-deserved holidays.
A bit of an election special this week given that we had, over the last week, the result of the UK, as well as the French elections, which we’re going to discuss in a second, as well as a bit of worse-than-expected US data, which we’ll come on to in a minute.
But first let’s talk about elections. So, the UK election was pretty much as expected, or as predicted by the polls, with a significant majority for Labour and really, and we’re going to focus on that in this podcast, the impact on markets was negligible. There was not really doubt in market participants’ minds that Labour would come out on top, and the reality is the programme, at least the way it’s perceived by markets, is fairly reasonable, let’s say, and as a result we haven’t seen any significant move, and probably we won’t see any significant move until some of the policies are put in place. So, nothing really to say about the UK election, again, from a market perspective.
A bit more interesting were the French elections. So, over the weekend we had on Sunday the second round, and if you recall after the first round the far-right National Rally party came out on top and was expected to repeat that in the second round, with the key unknown being whether the party would be able to secure an absolute majority, or would only be able to enjoy a relative majority.
Well, the actual result was quite different in the sense that the leftist alliance, called New Popular Front, ended up securing the most seats in the lower house, at 182, that’s out of 577. So, very far yet from an absolute majority.
The far-right National Rally has grabbed only 143 seats, which makes it the third party, behind the former presidential majority, at 168. So, roughly speaking, what we have is an almost perfectly three-way split in the French lower house. And that might not be a big deal in many countries in Europe that are used to coalitions and the parliamentary power being split, but in France it’s the first in a very, very long time.
So, from here we see a few scenarios being possible. And, by the way, it’s important to remember that no new election can be called for 12 months, so the situation we’re in is likely to last at least for a year.
So, one scenario could be that an alliance is formed around the centre, excluding the extreme right and left, that would give a reasonable majority. It would, of course, mean that this leftist alliance falls apart. This is possible, but probably not something that can happen immediately.
The other scenario is that French politicians learn to compromise and finally start working together around what would be described as more of a ‘technical’ government. Unfortunately, and I believe I can say it as a French citizen, this seems very unlikely given that the divergence you see around those three parties, and their ideology, which it’s very difficult to imagine that they can come to some form of broad consensus.
And so, the third scenario is really that nothing gets done, which is probably the most likely scenario, at least in the medium term. This is not necessarily bad news. I mean if nothing can get done then no mistakes will be made. That’s probably one way of seeing it. The not-so-good news though is that France is in dire need of reforms and its fiscal position is clearly unsustainable.
So, as they often do, markets may want to test French politicians in coming weeks, which could lead to volatility in both rates and the stock market. And we discussed that. Hopefully, you were able to join. We hosted a client call with François Baroin, who is the Chairman of Barclays France, and also a prominent French politician. And his takeaway was that most likely nothing is going to get done, and most likely it’s also probably too early to really feel confident that this is a buying opportunity in French stocks or in French debt.
The next few weeks are likely to be very noisy, and one great test for this new French political landscape will be the 2025 budget that will have to presented this autumn. So, more to come on France. That will probably keep us busy well into the end of the year, before we start focusing on the US election, which is another topic in itself.
But I want to also spend a minute or two on the economic data we got from the US last week. As you may remember, our 2024 outlook, in our recently published media Outlook, called for an environment where growth would be slowing down, leading to slower inflation, as well as lower rates and, fair to say that last week reinforced that view, in particular, the US ISM services survey, which fell back into contraction territory.
As you know, a reading of 50 is the demarcation line between a growth, above 50, and contraction, below 50. The consensus was expecting 52.7 for the services ISM, and the actual print was at 48.8. So, clearly in contraction territory and, in fact, it’s the lowest reading we’ve seen since May 2020.
So, it would suggest that the services industry in the US is experiencing a bit of an air pocket. This should have been expected to some degree. We know that manufacturing had been all the rage during COVID-19, when we were stuck at home ordering things from online, but services had been on a tear since the reopening of the US economy, as people spent a lot on travel and other leisure activities, but for the first time in a while, in fact since May 2020, we’ve seen that part of the economy contracting, suggesting that maybe people are not willing, or at least may be unable, to spend as much on leisure.
We also got a jobs report, which is very important in the US, and the results here were also quite mixed. The headline level was relatively strong, at least compared to expectations. The nonfarm payrolls came in at 206,000. The consensus was looking for 180,000, so a bit better than expected. However, if you look into the detail, you can see that, well, first the prior two months were revised lower by a cumulative 111,000.
The second thing that you can notice is that most of the jobs that were created in June were actually created in some form of government-related sector, either the government itself or education or healthcare. In fact, more than 75% of the jobs created that month were coming from those three sectors, so the US being in an election year, there is some scepticism around those job creation.
And finally, you can see that the US unemployment rate ticked up to 4.1% thanks to a slight increase in the labour participation rate. So, the bottom line really is that the jobs report wasn’t very strong at all, and the market took it this way by boosting its anticipation of the Fed being able to cut interest rates, not at their next meeting, which is on 31st July, but at the following one, which is in September.
So, it looks like the US economy is slowing. Whether it’s activity on the services side, whether it’s the jobs market, it looks like we are on track for the Fed to be in a position to cut interest rates for the first time in a long time in September.
Now, what does that mean for investors? Well, US growth might be slowing, but it isn’t yet slow in absolute terms, which really puts the economy in a sweet spot, at least when it comes to equity markets. And, as I’ve just mentioned, there is this justification building for the Fed to start cutting interest rates while corporate earnings still enjoy a reasonably healthy backdrop. And on that note, we will see the start of the earnings season at the end of this week, with US large-cap banks reporting.
But it’s important to remember that there is a very fine line between soft and hardish landing and that market sentiment can really turn on a dime, meaning that for now all is good, growth is slowing, the Fed is going to cut. That’s supportive of equity markets, but if suddenly investors start getting a bit worried that growth is slowing a bit too fast that could have negative implications.
So, we’re probably ahead of a few challenging weeks. It doesn’t mean that we necessarily expect markets to really significantly pull back from current levels, but some volatility is to be expected and we really need strong delivery when it comes to this upcoming earnings season.
So, aside from the earnings season, what else do we need to be on the lookout for this week? We’re going to get the Fed chair Jerome Powell’s testimony in front of the Senate on Tuesday and then the House on Wednesday, so interesting to see if he makes comments following the data that we saw last week.
We’re going to get some data from China in terms of inflation, CPI and PPI, that will be on Wednesday, as well as some import and export data on Thursday. But really the main release for this week will be US inflation figures, CPI for the month of June that will be released on Thursday. We’ve continued to see some progress on US inflation. This is what markets expect to see again in June. We’re currently in a mindset where markets would probably welcome a slightly slower, or in line, inflation print. That would, again, reinforce this idea that the Fed is set to cut in September.
So, quite a few things to look out for, as well as I mentioned the earnings season. We will, of course, be back next week to debrief all that but, as usual, and as always, in the meantime, we wish you the very best for the trading week ahead.
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