French election puts pressure on European fixed income

The European fixed income market has seen an upward movement in the last month largely due to the economic and political uncertainty in France. This follows President Emmanuel Macron's call for elections, which were won in the first round by Marine Le Pen's party, explained MAPFRE AM's Fixed Income Manager, David Iturralde, on Radio Intereconomía.

“Public debt is reflecting the uncertainty related to these elections," said Iturralde on the Capital Intereconomía program. The expert recalled that, “according to the programs they have set out," the two political parties that came first and second in the first round of yesterday's legislative elections, the National Rally and the New Popular Front, are proposing an increase in public spending and a confrontation with the European Union.

The debt of peripheral countries, such as Spain, is also "infected" by this scenario, said David Iturralde, a situation that “isn’t over yet” because, with a second round of elections and a subsequent governing majority still pending, the uncertainties have not yet been resolved.

Returning to the French case, the fixed income manager explained that France "already had a budget problem," with debt exceeding 110% of GDP and a deficit of around 5.5%. “If you add more spending to this, it's a problem,” summed up Iturralde, as he outlined the promises of higher spending in electoral programs.

Therefore, “perhaps the only solution is not to have an absolute majority but a certain unstable balance,” which would curb the most extreme plans of the winning parties, according to Iturralde.

Central bank expectations and inflation

Speaking of central banks and their next steps in monetary policy, the MAPFRE executive said that it’s necessary to differentiate between the United States and the European Union, because “they’re not in the same situation.” While the US is showing more robust growth, the EU is showing signs of cooling, and in the second half of the year “there will be some slowdown.” “Spain is one of the few countries holding its own,” said Iturralde, while the economies of France, Italy and Germany are slowing down.

In this context, inflation in Europe “may hit 2% sooner than we thought,” and "there’s room for the ECB to revise rates by cutting one or two.” The Federal Reserve, for its part, could cut rates "at the end of the year," predicted Iturralde.

For MAPFRE AM, in this economic scenario “there are still opportunities” for fixed income, especially in the short and medium term, as well as in the credit market, where “we can find very interesting opportunities," said Iturralde.