Polarisation has for years left the country’s politics stuck in an unpopular middle ground, and the latest elections won’t change that
2 min
When it comes to France’s turbulent politics , the current impasse is probably the best investors could have hoped for.
The second round of French legislative elections delivered a widely expected hung parliament, but not its predicted makeup: Rather than coming in first, Marine Le Pen ’s far-right and anti-immigrant National Rally finished third. In a shock twist , the leftist New Popular Front alliance emerged victorious, with the party of President Emmanuel Macron and its allies in second place.
This is because leftists and centrists ended up coordinating. In many local races, candidates dropped out to avoid dividing the vote against the far right. Still, no party has an outright majority, which plunges the country into political gridlock. This was, counterintuitively, the preferred outcome for financial markets.
The CAC 40 initially tumbled when the elections were called in June, driven by fears of a potential National Rally government challenging the European Union with fiscally expansive plans. Then the French stock benchmark perked up, as the first-round results suggested that the far-right wouldn’t get a majority.
Yet markets remained volatile because the rise of the New Popular Front raised even greater concerns. The policies of this coalition, in which leftist firebrand Jean-Luc Mélenchon is a key leader, also include more public spending, on top of widespread tax increases. Indeed, the CAC 40 closed down 0.6% Monday, probably reflecting investors’ concerns about these parties potentially managing to form a new government. Mélenchon has stated that there will be no deals with the centrists.
These worries seem overblown. Yes, there are doubts about how France will handle its budget deficit, which amounted to 5.5% of gross domestic product in 2023 and has forced the EU to launch an “excessive deficit procedure” against the country. Macron may need to accept the reversal of reforms such as a higher retirement age.
Still, a fiscal crisis isn’t in the cards, because the European Central Bank is ultimately in control of France’s bond market.
As for economic growth, it is unclear how much impact Macron’s policies have had in the first place, particularly given resistance from unions and swaths of the public, which resulted in the famous “yellow vest” protests in 2018 and 2020.
What matters for sectors battered in the stock market, including banks, energy firms and infrastructure operators, is that the risk of widespread tax increases, nationalisations and a prolonged standoff with Brussels seems smaller now than a few weeks ago. Whatever Mélenchon says, the left will either have to compromise or else form a minority government that might scare investors but wouldn’t be able to pass laws.
So there isn’t much justification for the lower valuation of lenders such as Société Générale and especially BNP Paribas —one of Europe’s most interesting banks that now trades at 0.65 times tangible book value. The same is likely true for firms such as energy utility Engie and infrastructure-concessions leader Vinci , which have lost 8% of their market value since the end of May.
These elections are more a symptom of Macron’s weakness than its cause. After a chaotic month, French politics is back where it has been for years, with a rising far right forcing the left to back a centrist platform that can achieve little because few people actually like it. Macron himself became president on an anti-Le Pen ticket, but in seven years has failed to rally broad support for his pro-business vision.
This could eventually make Le Pen’s victory inevitable, as she claimed after initial results came in. For now, though, it is more or less what markets ordered.
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Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.
3 min
Wall Street’s hottest trade has gone ice cold.
For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.
The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.
Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.
“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.
Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.
Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.
Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.
“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.
Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.
“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”
Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.
Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”
The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.
The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.
These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.
Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.
The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.
Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.
Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.
And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.
“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”
