European markets turbulent amid French political uncertainty

European stock markets affected by French political upheaval

Last week, the DAX, the FTSE, and the CAC, the French stock market, were significantly affected by the political upheaval in France. This occurred after French President Emmanuel Macron called a snap election after a disappointing performance at the European Parliament Elections.

French deficit likely to worsen under National Rally ruling

As we approach the French elections (30 June and 7 July), European financial markets will likely face a period of uncertainty. Key concerns include voter turnout and the possibility of major players forming coalitions.

The most probable scenario is that Marine Le Pen’s National Rally will become the leading party in France, a proposition that isn't as daunting as it once sounded. Since 2017, Le Pen’s party has softened its anti-EU stance and no longer calls for a Frexit. However, its election would likely exacerbate France's deficit, which reached 5.5% of GDP last year and prompted S&P Global to downgrade France's sovereign credit rating to AA- recently.

Paris Olympics to overshadow French drama

As someone who sat on the desk of a French Bank during the European Sovereign crisis over a decade ago, I am no stranger to what debt concerns can mean for markets. Nonetheless, in the grand scheme of things, the latest round of European drama is a "lightweight" version. It is unlikely to hold the spotlight much past mid-July before the Paris Olympics captures the world's attention.

Turning to events elsewhere in the region, the focus this week will be on Thursday's Bank of England (BoE) interest rate meeting, previewed below.

• UK

Bank of England interest rate decision

Date: Thursday, 20 June 9.00pm AEST

In May, the BoE kept rates on hold at 5.25% with a 7-2 vote as Ramsden and Dhingra dissented in favour of a 25 bp cut. Combined with downward revisions to the Consumer Price Index (CPI) forecasts, which measure inflation, and some tweaks to the statement, it was considered a dovish statement that potentially opened the door for a rate cut in June. Depending on upcoming "data releases and how these inform the assessment that the risks from inflation persistence are receding."

Unfortunately, since the May meeting, a higher-than-expected April inflation reading has reduced the chances of a BoE rate cut this week to almost zero. However, if May's inflation report, released just a day before this week's BoE meeting, holds better news, it will help clear the way for a 25 bp rate cut in September.

BoE official bank rate chart

DAX technical analysis

In our updates during May, we suggested that the rally from the mid-April 17,626 low was the final leg (Wave V) of an impulsive rally from the October 2023 14,630 low. As stated within Elliott Wave theory, a Wave V is usually the final leg of an impulse move before a correction unfolds.

We also noted that a sustained break below short-term support at 18,600/400ish (which occurred last week) would indicate that the rally has run its course and that a deeper pullback has commenced.

Since our last update two weeks ago, the various pieces have fallen nicely into place. We believe the DAX completed a five-wave advance at the mid-May 18,892 high. While it remains below that level, we expected to see a deeper correction towards the mid-April 17,626 low.

DAX daily chart

FTSE technical analysis

We moved to a neutral bias ahead of the BoE meeting on 9 May, looking to rebuy a pullback. After holding a bullish stance in the FTSE since mid-March, which caught the FTSE's blistering run higher.

While the lows in the current pullback aren't convincing, we will remain with a positive bias, proving the FTSE remains above support at 8050/8000. Aware that a sustained break below support at 8050/8000 would signal that a deeper decline is underway and a shift back to a neutral bias.

FTSE daily chart

• _{Source: TradingView. The figures stated are as of 18 June 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}