"However, depending on the outcome of the political horse trading in Paris to form a government and its ability then to push through policies, the outlook remains uncertain.
“The far left’s economic policies are just as alarming to Brussels and the bond markets as those of the far right; if pursued they would most likely cause investors to seek a ‘risk premium’ for lending to the French government.
"On the other hand, if France’s governing system becomes paralysed, little will be done to help overcome economic stagnation or reduce France’s very overstretched government finances."
Inevitably, these concerns will impact certain sectors more than others. In the case of France, the banks have been in the firing line.
Seen as a proxy for the broader French economy, investors have worried about increased funding costs based on wider French credit spreads. France’s banks are particularly reliant on wholesale funding (as was the case with Northern Rock), which makes them more vulnerable.
The US election
This is likely to be a problem in the upcoming US election as well. US debt is currently 122 per cent of GDP, with neither side showing any inclination to address it. The Republicans want more tax cuts, while the Democrats want more spending.
While the US is afforded more fiscal leeway than many of its peers, markets’ patience may be tested.
The race itself is now on a knife-edge after President Joe Biden announced he will step down as the Democratic nominee, with Kamala Harris taking his place – so there remains significant uncertainty at this stage.
This is a greater danger for bond markets and the dollar than for stock markets. Nevertheless, there are risks around the imposition of tariffs and restrictions on trade should Donald Trump deliver on some of his wilder promises.
The global technology behemoths of Apple, Nvidia or Amazon have shown themselves adapt at finding workarounds, but it would undoubtedly be disruptive for sectors such as autos, electronics, and retail. Tariffs could also be inflationary, potentially pushing up borrowing costs again.
That said, some economists see stronger growth under a Trump presidency.
George Brown, senior US economist at Schroders, says: “If Trump were to win the election, our expectation is that US growth would be stronger and inflation firmer. However, the Trump campaign has been light on detail and so it is difficult to make assumptions about economic policy.”
Some investors are maintaining a relatively defensive stance as a result. Steve Kelly, manager of the AXA Framlington American Growth fund, says: “We remain cognisant that interest rate increases impact the real economy with a lag and that there are still growth challenges ahead.
