​​​French political crisis intensifies, Barnier resigns

Political impasse deepens

Michel Barnier resigned as French Prime Minister on Thursday, just months after his appointment, with President Emmanuel Macron addressing the nation in the evening. Marine Le Pen, the far-right leader, may challenge any new Prime Minister, potentially forcing early presidential elections before a court case affecting her eligibility.

Deputy Manuel Bompard of La France Insoumise has called for President Macron's resignation, claiming it's 'the only solution to bring back stability.'

Despite the calls, Macron remains firm on serving his full term until 2027, leading to ongoing political tension. Bompard criticised Macron's tendency to appoint allies as prime minister despite electoral setbacks.

New prime minister candidates

Former presidential candidate Segolene Royal has offered herself as a potential replacement, emphasising the need for left-wing representation and female leadership. Royal, France's first female major party presidential candidate, has ministerial experience in environment and energy. Her candidacy follows an unsuccessful bid in August and highlights the ongoing political struggle.

Segolene Royal

Market implications

The euro remains near two-year lows following the no-confidence vote, maintaining relative stability.

Continued political paralysis raises the risk of a credit rating downgrade for France and potential negative impacts on the Eurozone.

French government bond futures remain stable, but traders are cautious of potential volatility. France’s debt refinancing briefly rose above Greece's levels, and the French-German Obligations assimilables du Trésor (OAT) Bund bond spread, which widened last seen in July 2012, didn’t widen further post-vote.

OAT-Bund daily chart

European Central Bank stance

European Central Bank (ECB) President Christine Lagarde has maintained a cautious stance, acknowledging that financial stability factors feed into price stability considerations.

The political crisis affects both major European powers, with Germany also facing significant challenges. Despite this, the reaction over the last week or so has been a switch out of French equities into German ones, with the DAX 40 rallying by over 5% and on track for its sixth consecutive day of gains, whereas the French CAC 40 practically flatlined above its August low. Year-to-date, the CAC 40 is down 2.5%, whereas the German stock market has gained 20%.

No parliamentary elections can occur until at least July, suggesting prolonged uncertainty. This situation poses challenges for European monetary policy and economic stability.

CAC 40 versus DAX 40 year-to-date performance chart

CAC 40 technical analysis

Key technical support on the CAC 40 is made up of the August to November lows, which were at 7091 to 7030.

While this key support area holds, the CAC 40 may gradually regain some of this year’s losses and may still end up the year in slightly positive territory, especially if United States (US) markets maintain their drive higher and continue to set new record highs, keeping global risk appetite elevated. For even a short-term bullish reversal to occur, the CAC 40 index needs to rise and make a daily chart close above its 25 November high and ideally also rise above its September low at 7342 on a daily chart closing basis.

Only in such a scenario would a minor bottom be formed, and the 7500 region would be back in play. For a medium-term bullish trend reversal to unfold, a rise and daily chart close above the September peak at 7804 would need to be seen.

A fall through the major 7091-7030 support zone and the psychological 7000 mark, though less likely than a gradual advance into year-end, could lead to the March and October 2023 lows at 6797-6774 being targeted.

CAC 40 daily candlestick chart