​​​​​CAC40 slumps – political turmoil in France drives European markets lower

​​​Stock market slump deepens as investors fret about elections

​President Macron’s decision to hold snap elections in the wake of the European elections on Sunday has caused a sharp drop in European markets, particularly the CAC40.

​Indices on the continent have dropped quickly over the past week as the election, seen as a gamble by many, has caused a wave of selling by investors. European markets, which were in many cases at record highs just a month ago, are now nursing heavy losses.

​Division on the right

​Marine Le Pen's Rassemblement National (National Rally) party faced internal turmoil when a traditional right-wing leader expressed his desire to join forces with them. This leader was swiftly dismissed by his own party members and, in a dramatic turn of events, he barricaded himself inside the party building. Ultimately, this incident highlighted the current division within the right-wing political sphere in France.

​​A new Popular Front appears on the Left

​On the left, a new coalition named the Popular Front (reminiscent of the 1936 party) has emerged, comprising the Communists, La France Insoumise (Unbowed France) led by Jean-Luc Mélenchon, the Socialist Party, and the Green Party. While this alliance is unlikely to secure a victory, it effectively prevents any of its members from aligning with President Emmanuel Macron's centrist movement.

​Political landscape transformed by uncertain outlook

​As the first round of elections approaches, it appears that France may not achieve the necessary unity to overcome the challenge posed by Marine Le Pen's party. The divisions within the right-wing camp and the formation of the leftist Popular Front alliance suggest a fragmented political landscape, making it difficult for any single force to emerge as a clear frontrunner.

​France has gone from having a secure government to facing a period of uncertainty. If Macron's party fail to win a majority then there is a high risk that France may find itself with a government sharply at odds with President Macron, leading to institutinal paralysis. This would drive up the yields on French debt and cause other ructions in eurozone bond markets generally, as well as potentially leading to euro weakness and losses for European stock markets.

​CAC40 – technical analysis

​The CAC40, the main French index (known as the France40 on the IG platform) was already declining before the election announcement, having reached record highs in mid-May.

​However, the news has driven it sharply lower over the week, breaking below the 200-day simple moving average (SMA) for the first time since January (when it briefly moved below this indicator).

​At present, with outflows driving the index lower, it looks like there is little sign that the price will pay much heed to any potential support levels. However, in the short-term, the January low around 7300 will be an initial target.

​Short-lived bounces such as the one we saw on Wednesday are likely to be taken as selling opportunities, but in the near-term a close back above 7600 and then above the 200-day SMA might suggest that a low has formed for now.