LIVE MARKETS-Don't forget about France

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DON'T FORGET ABOUT FRANCE

Political troubles in France might be starting to brew again and that could spell trouble for France's stock market which has already underperformed its regional peers this year.

June 7 marked one year since President Emmanuel Macron dissolved the National Assembly, meaning new parliamentary elections become possible again from next month even though a new vote appears unlikely.

"For now, neither President Macron nor the opposition parties have expressed a preference for new elections," write Goldman Sachs.

"New elections would increase uncertainty and, in our view, likely lead to a further deterioration in France’s economic and fiscal outlook, particularly if parliament remains deadlocked."

While French debt trades at a premium to Germany, the bond market is not showing major signs of stress. The spread between French and German 10-year yields DE10FR10=RR stands at about 68 basis points, after widening to as much as 90 bps late last year.

France's stock market on the other hand has massively underperformed its German counterpart. The CAC 40 .FCHI is up just 2.4% year-to-date compared to a near 19% gain for Germany's DAX .GDAXI.

Barclays believes this may be down to other factors rather than political stress but still cautions on trouble ahead.

"Cac has underperformed, but largely due to weakness in export oriented names, like luxury goods," writes Barclays equity strategist Emmanuel Cau.

"It suggests that trade-related concerns around tariffs and China have had a greater impact than political risk."

Indeed, when looking at domestic stocks, performance has been strong. France's three big banks - Soc Gen, Credit Agricole and BNP Paribas - are up between 19% and 75% for example.

"while we do not expect a repeat of last years summer stress ... we believe that weak macro, as evidenced by the poor June PMIs, and potentially tricky budget negotiations may justify a higher risk premium of French markets," Cau adds.

(Samuel Indyk)

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