Au Revoir, Nicolas
Last weekend France went to the polls for the first round in the presidential election. Nicolas Sarkozy, the incumbent representing the center-right UMP (Union pour un mouvement populaire) party, narrowly trailed his Parti socialiste (Socialist Party of France or SP) opponent, François Hollande. A second round runoff, between Messrs. Sarkozy and Hollande, is scheduled for Sunday, May 6th. On the same day, Greece also goes to the polls. Greeks will vote in a parliamentary election to replace the current technocratic, care taker government headed by Lucas Papademos. Jittery markets — in Europe and elsewhere — will be reading the results for signs of a repudiation of the fiscal austerity measures adopted throughout much of southern Europe in response to the sovereign debt crisis.
Opinion polls suggest Sarkozy will be denied a second five year term in office. The latest survey, conducted by Harris Interactive, shows Hollande with a commanding ten percent lead over his rival. While Sarkozy may still prevail in the second round, the odds against grow with each passing day. Many commentators contend the election is less a referendum on the Franco-German fiscal concordat (between the German Chancellor Angela Merkel and the French President Nicolas Sarkozy), than a rebuke to the man himself for his perceived gauche style. While this may be so, it is also true that austerity fatigue has set in not just in Greece, Italy and Spain, but in the Netherlands and France as well. One cannot discount this, no matter what polls indicate, as a factor.
Five weeks after the second presidential election round, France returns once more to the polls to chose the 14th National Assembly of the Fifth Republic. Consensus predictions are the UMP will retain control of the National Assembly, resulting in a divided government (cohabitation to the French). Much though can happen in the next four to six weeks. Events may unfold which cast the anticipated Hollande victory as a signal Europe may change tack and adopt another course to navigate the debt crisis.
The recent announcement by Standard & Poor's, cutting the sovereign debt rating of Spain (from A to BBB+), is one such event that may influence the upcoming elections. The man on the street in Athens, Rome, Madrid and perhaps in Paris as well probably questions the wisdom of continued sacrifice when the financial markets never seem to be quite satisfied.
For these reasons investors will be trying to gauge voter sentiment to discern whether or not a policy shift is in the offing. Changes in both the occupant of the Élysée Palace (the French president's residence) and the composition of the National Assembly may portend a deterioration in the economic entente that has steered Europe through the debt crisis thus far. The financial markets, as well as Chancellor Merkel, will not have to wait long to see where Hollande's sympathies lie. Already, Hollande and Merkel are exchanging barbs over whether the recently agreed upon fiscal pact can be renegotiated. Hollande says yes; Merkel, no. Unless these differences can be patched up, another roller coaster ride in the European markets looks likely.
And, for these reasons, the equity market gains of the 1st Quarter have been lost so far into the 2nd. All Eurozone equity markets saw their 1st Quarter gains partially erased or the price slide continued (in the case of Spain) in US Dollar terms. In small part, the Dollar's 1.1 percent gain (versus the Euro) since the end of the March is to blame. But in Euro terms the tone is decidedly negative. Each of the eleven Eurozone equity markets tracked by MSCI has fallen thus far in the 2nd Quarter.
Over the last week, markets have stabilized — at least for the moment. In a nervous market the slightest misunderstanding of intent can send share prices down. Investors will jump to read into the upcoming election results. While the French populace may wish to say "Au revoir" to Sarkozy, the rest of the world may think it premature to bid him "Adieu".
Returns reflect the results for selected European country and regional equity indices compiled and maintained by MSCI. All returns are expressed in US$ terms and include the reinvestment of dividends after all applicable with holding taxes have been deducted.
All indices cited are free float-adjusted and market capitalization weighted.
(Source: Lipper; MSCI.)
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