After French President Emmanuel Macron’s new Prime Minister Sébastien Lecornu resigned yesterday, less than a day after his cabinet was announced, wealth managers discuss next steps and the impact on asset allocation.

France’s newly-appointed Prime Minister Sébastien Lecornu resigned yesterday after less than a month in the post, causing stocks to fall sharply on the Paris stock exchange.

The benchmark French stock index fell by as much as 3 per cent, while the French government’s 10-year borrowing costs climbed to 3.57 per cent.

"To lose one prime minister is unfortunate, but four looks like a major crisis. Markets were blindsided by the news [on] Monday morning that yet another resident of the Hotel Matignon has departed, resulting in yet another new chapter in the torrid drama that is the French government,” Chris Beauchamp, chief market analyst at IG, said in a note. “Unsurprisingly the reaction has been concentrated in the CAC 40, the French stock market index, though the euro is lower against the dollar. The real worry will be that the procession of prime ministers unable to govern will at some point force the resignation of President Macron, which would cause the crisis to intensify significantly." 

The resignation came 26 days after Lecornu was appointed prime minister; the country’s previous Prime Minister François Bayrou had lost a confidence vote. Macron has three options. He can appoint another prime minister. He can once again dissolve the National Assembly. Or he can resign himself, the latter being less likely.

Peter Goves, head of developed market debt sovereign research of MFS Investment Management, highlighted the new uncertainty for markets and the highly fluid situation, saying it is one reason why OAT-Bunds – the difference between French government bonds (OATs) and German government bonds (Bunds) – remain wide and may leak wider still. “It’s plausible Macron appoints a new Prime Minster. In this scenario, it’s unclear if this is another centrist, or is “left leaning” or perhaps is “technocratic.” In any case, the fundamental questions all remain: how to pass a budget in a highly fragmented parliament,” Goves said. “Then there is the rising chance of new parliamentary elections, the outcome of which is inherently unknowable but is an event risk which may see RN gain seats. This remains a French affair, with limited spill-over effects to the broader euro area. Our main takeaway is that it’s hard to argue for a material tightening in the OAT-bund spread for the time being.”

Meanwhile, Mathieu Savary, BCA Research chief strategist of developed markets ex-US, believes that Lecornu’s resignation confirms that French bonds remain uninvestable. “As long as there’s no majority in parliament, no one will be able to tackle France’s debt and fiscal problems. The problem is that dealing with this issue will most likely demand a full-blown crisis in the OAT market to discipline French politicians,” Savary said.

Michaël Nizard, head of multi-asset and overlay at Paris-based Edmond de Rothschild Asset Management, thinks that the President could be forced to announce a new dissolution in the coming days, which could increase upward pressure on French interest rates and the underperformance of the CAC 40, with a significant risk of tensions spreading to other assets such as French banks, the euro and peripheral spreads. “This scenario is becoming increasingly likely given the inability to find a compromise with the forces currently present in the National Assembly,” Nizard said.

“If Macron decides to once again ward off the spectre of dissolution, two other scenarios seem possible. The first would be to appoint a Prime Minister close to the left, whose room for manoeuvre would be extremely limited but who would be more likely to obtain the PS's indulgence,” Nizard continued. “In this case, fiscal consolidation efforts would be minimal, but the financial markets might agree to see the glass as half full and be satisfied with no worsening of the public deficit, a scenario that would keep the OAT-Bund spread at levels higher than the historical average but without reaching new peaks.”

“The latest scenario on the table is that of a technical government, similar to what was practised in Italy during periods of political instability. This government would be responsible for passing a budget more or less similar to this year's and managing day-to-day affairs, but it would only be transitional until political clarification comes, which will happen no later than 2027 but probably sooner when E Macron deems it appropriate to hold new legislative elections,” Nizard said. “Beyond the distribution of probabilities between these different scenarios, none of them appears particularly promising for the attractiveness of French rates, which leads us to maintain our underweight position in bond portfolios.”