Following the results of the first round of French elections, all eyes were on how markets were going to react to the election results. So far, shares on the French stock market have risen, after the first round of voting in the country’s parliamentary election have eased concerns about an outright victory for the right-wing National Rally (RN) party, in the second round. Even the euro rose against the dollar, while the risk premium investors demand for holding French government bonds fell as the markets took the view that the result could have been worse.

Having said so, France’s two-round voting system, however, makes it all but impossible to extrapolate a final breakdown of seats after next Sunday’s run-offs, with three of the country’s largest polling companies estimating the RN could wind up with anywhere between 230 and 295 seats. With 289 seats needed for a majority, and given the huge scope for tactical voting in the second round, the RN is given only a slim chance of forming the next government alone. However, all this uncertainty is something which markets hate more than anything. The next days will reveal a lot. The worst case scenario is that France could find itself in a gridlock situation. This could occur either due to a hung parliament or even if the RN secures an outright seat majority. Despite this, the extensive powers of the presidency under the French constitution could still lead to two years of effective gridlock. What is sure is that as the electoral process in France unfolds, markets will react according to the overriding perception of things.

Speaking on perceptions, the latest Central Bank Economic Update has shown that in May, the European Commission’s Economic Sentiment Indicator (ESI) for Malta increased to 97.2 from 96.1 in April. Sentiment remained below its long-term average of around 100, estimated since November 2002. However, it stood slightly above the euro area average of 96. In month-on-month terms, sentiment improved in industry and to a lesser extent among consumers, while remaining negative. By contrast, sentiment deteriorated in the retail, services and construction sectors.

Consumer confidence was slightly less negative in May, improving to an average of -9.0 from -9.2 in April. This level remains just above the long-term average of -10.2. Consumers’ expectations of their financial situation over the next 12 months, and the assessment of their finances over the last 12 months were less negative than before. However, expectations of major purchases over the next 12 months continued to deteriorate.

The sentiment indicator for the services sector stood below its long-term average of 19.5. It averaged 13.2, compared with 15 a month earlier, reflecting a deterioration in the firms’ expectations of demand for the next three months. By contrast, their assessment of the business situation and of demand over the past three months, stood more positive than a month earlier.

The sentiment indicator for the construction sector decreased to -1.1 in May from 3.2 in April, but remained above its long-term average of -7.6. Contrary to April, respondents assessed their overall order books to be below normal levels.

The confidence indicator in the retail sector decreased but remained above its long-term average of 0.5. It stood at 2.7 in May, down from 9.8 in April. The recent fall in sentiment was largely driven by a significant decrease in participants’ expectations of business activity over the next three months. At the same time, retailers’ assessment of sales over the past three months was less positive compared to April. These developments were partly offset by a decrease in the share of retailers who assessed their stocks of finished goods to be above normal levels.

Additional survey information shows that, in month-on-month terms, price expectations decreased across all sectors, bar the construction sector. The largest decreases were recorded in the services sector and among consumers. The net share of respondents signalling price increases ranged from under 1% in the services sector to around 31% in the construction sector, with price expectations in May standing below their long-run average across all sectors, except in the construction sector and in industry. One must say that price increases in construction are of a very different nature.

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