French Gridlock Shouldn’t Comfort Markets, Rabobank’s Foley Says

(Bloomberg) -- The prospect of a hung parliament after France’s election on Sunday shouldn’t cheer investors given that it would mean budget gridlock, according to Rabobank currency strategist Jane Foley.

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In an interview with Bloomberg Television on Wednesday, she told Tom Mackenzie that last weekend’s first-round vote outcome, putting the far-right National Rally on course for a victory that could fall short of a majority of lawmakers, has bred complacency.

“In the last few days, the market has been sort of celebrating the likelihood that France could have a hung parliament,” said Foley, who is Rabobank’s head of FX strategy. “A hung parliament means that it’s not going to be able to really make much additional progress in bringing down its budget deficit — meaning that it is in line for further difficulties with Brussels.”

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Foley pointed to last month’s reprimand from the European Commission for countries including France. Under European Union rules, members should try to keep deficits to a maximum of 3% of gross domestic product, a ceiling the country was already nowhere near meeting even before the prospect of parliamentary stalemate made that even less likely.

“What we see now in French politics can only highlight the difficulties that France has been having with its budget, the difficulties it will continue to have after Sunday’s second-round election result,” she said.

Following Sunday’s vote, the spread between France’s 10-year OAT and Bund yields narrowed this week after hitting its widest level since 2012 last month in the wake of President Emmanuel Macron’s decision to call the snap election. At the same time, the euro has been recovering from a near two-month low versus the dollar hit last week.

Still, moves in the options market suggest that the euro’s rebound masks lingering pessimism that it can hold its recent gains over the next month.

“The market in many respects has to date, up until very recently, been very complacent on the budgetary issues around France, Italy and some other countries,” she said. “As we move towards the end of the year, the market cannot be so complacent about that.”

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