Bond Markets Weigh In on July’s Elections

Editors’ Note: MarketMinder prefers no political party nor any politician. We assess developments for their potential economic and market impact only.

Nearly a month on from the UK and French elections, fear still dots the landscape. The most apoplectic handwringing has died down, but we still see plenty of articles warning economic policy in both nations is set to deteriorate, hurting their economies and stocks. But with a few weeks in the books, how are markets actually dealing with these changes in government? The early evidence suggests to us they are moving on nicely.

If you look at market returns alone, it will be hard to tease out the elections’ impact. It is too short term, with too much other noise interfering. Not only did a global pullback start mid-month, but sector and style composition muddy the waters. For instance, since market close on July 4, the day of the UK’s election, UK stocks are up 1.7% while global markets are down -1.2%.^[i] But is this because the change in government is massively bullish? Or because small and value-oriented stocks—which dominate in the UK—have led during the world’s pullback? Mind you, we think UK stocks are likely to benefit from falling uncertainty and relief when the new government does less than feared. But we don’t think it is right to declare three-ish weeks’ worth of returns meaningful. Markets are too bouncy and fickle in the short term for any sweeping conclusions to be rational.

Same with France. Since market close on July 5, the final trading day before the parliamentary election’s second round, French stocks are down -1.3%.^[ii] But global stocks are down a smidge more, -1.6%.^[iii] So is France’s slightly milder fall the fruit of relieved political fears? Or is it a logical function of France’s relative lack of Tech and Tech-like stocks during a pullback where those fell hard? Here, too, while we think France’s gridlock is bullish, as it should keep legislative risk low, we don’t think you can draw sweeping conclusions from such a limited window.

Thankfully, there is another place we can look to see how investors are dealing with these events: bond auction results. Both elections sparked some fiscal worries. In France, pundits claimed the left-green alliance’s plurality in the National Assembly risked ratcheting up public spending and sparking debt woes. In the UK, concerns centered on the supposed potential for high deficits and higher taxes under Labour. In both cases, if the fear were real, we would expect investors to be rather leery of buying new bonds.

But so far, things seem to be going well. France’s July 18 bond auction offered investors 3-year, 5-year and 8-year notes (known in France as OATs). All fetched healthy bid-to-cover ratios of 2.47, 2.37 and 2.57, respectively.^[iv] The inflation-linked OATS sold that day attracted even more interest, with bid-to-cover ratios of 4.16 for the 3-year offering, 3.06 for the 4-year, 2.93 for the 10-year and 3.23 for the 30-year.^[v] All are in line with May’s auctions, which occurred before President Emmanuel Macron called the snap election, suggesting politics haven’t dented investors’ appetite.

Britain’s auctions are also going fine. The Debt Management Office has auctioned five Gilt issues since the election—one inflation-linked, four traditional. The inflation-linked offering, a 5-year note, actually fetched the lowest bid-to-cover ratio, 3.08.^[vi] While down a whisker from the bids at similar auctions earlier this year, it is plenty robust. As for the rest, the 7- and 20-year Gilts each notched 3.29 bid-to-cover ratios, the 5-year fetched 3.10 times the amount on offer, and the 30-year attracted a 3.35 bid-to-cover.^[vii] All are in line with demand for their counterparts issued before the election.

So no, investors aren’t running scared on either side of the English Channel. They are moving on and investing in Britain and France. This is what happens in stock markets, too, even if short-term wiggles make it difficult to see without more hindsight. When an election sparks fear, markets price the worries in the run up to the vote. Then, they get on with it—and often do well as fears prove false and global factors swamp local.