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French shares and the euro were hit hard on Monday after the first round of elections showed President Emmanuel Macron would suffer a landslide defeat but fall short of winning an absolute majority in parliament.
France’s CAC 40 index, which represents the 40 most important companies listed in Paris, rose 2.7% on the searchable. The index closed up 1% earlier but is still about 6% below levels reached before Macron called a snap election on June 9.
Stocks piled up, a signal for the economy, reversing some of their biggest losses in recent weeks. Shares in BNP Paribas closed up 3.6%, with second-ranked Societe Generale and Credit Score Agricole climbing 3.1% and 2.8% respectively.
The euro, which fell near Macron’s miracle election announcement, briefly touched its strongest level against the buck in more than two weeks on Monday.
The returns sought by investors on French executive bonds for the risk of handover, or retaining them, have remained largely unchanged compared to their ultra-safe German counterparts in contemporary days. On Friday, the risk rate on German executive debt reached its highest level since the eurozone peak more than a decade ago.
While Macron’s defeat this week is the most fraught note yet for France’s uncertain budget – a hung parliament could lead to merciless gridlock – it seems the worst has abated for traders. Just two weeks ago, they were worried about the possibility that France could head towards fiscal extremes related to the 2022 UK market crash due to unrealized tax cuts driven by former Prime Minister Liz Truss.
In a surprisingly high turnout the following Sunday, Marine Le Pen’s far-right National Rally party took the lead in the first round with 33.15% of the vote, with the leftist Unused Common Front coalition in second place with 27.99%. Macron’s coalition slipped to a disappointing third place with 20.76%, according to final results published Monday by France’s interior ministry.
“The outcome is probably better (for markets) than feared, but not as good as the situation three weeks before the elections,” Mohit Kumar, chief economist for Europe at Jefferies, wrote in a statement on Monday. “The immediate reaction is one of a relief rally.”
Going into the first round, investors feared that voters would elect a far-right or far-left parliament committed to spending more on the federal government, which would further increase the country’s already high debt and budget deficit. The excess between what it spends and what it receives in taxes.
At the end of the last century, France’s government debt stood at 110.6% of gross domestic product. The budget deficit reached 5.5% of GDP, one of the highest numbers among the 27 EU countries.
Sunday’s vote may have reduced the risks of excessive fiscal policies in Europe’s second-largest economy, but investors are still worried that an antiquated, divided parliament will not be able to handle the country’s debt transition.
“We could still see political paralysis in France over the next few years with the reform process stalling,” Kumar said of Macron’s insurance policies aimed at boosting economic growth.
Many other analysts also see a hung parliament as a possible outcome, which could lead to the party capturing a majority of seats.
According to Holger Schmieding, chief economist at Berenberg, this would lead to “gridlock”. “In this case, no new government will be able to do much,” he wrote in one word on Monday.
Even worse than the gridlock would be if Le Pen’s nationwide rally joins forces with parts of the left opposed to lowering taxes and some of Macron’s reforms, such as raising the quitting moment to 64 for many workers.
The nationwide rally has promised to reduce the value-added tax on electricity, gasoline and alternative energy products from 20% to 5.5%. And suspend it altogether for rating minor prerequisites. Meanwhile, the leftist Unused Common Front has promised to raise the minimum wage and stabilize prices of several key commodities.
The third position – called “Marine Meloni” – could see Le Pen follow the example of Italian Prime Minister Giorgia Meloni and sign insurance policies reminiscent of a tough stance on immigration, Which are watering down “more costly or disruptive financial commitments”. According to Schmieding, to win the 2027 presidential election.
He said, “The three main scenarios above point to a gradual worsening of the outlook for France… but they do not point to an immediate Liège-Truss style crisis.”
In the long run, some of Macron’s reforms generally backfire, leading to reduced economic growth and increased inflation.
“With the possibility of a downgrade in the (credit) rating, this will increase financing costs and worsen France’s financial problems over time,” he said.
Ranking company S&P downgraded the French executive’s creditworthiness in May, citing a “deterioration in the budgetary situation”, although it still thinks the country has sufficient capacity to repay its debt.
With the full round of voting set for July 7, the outcome of the French election is still uncertain, leaving the door still open for Le Pen to win a majority in a nationwide rally.
“We suspect this morning’s improvement in sentiment will continue into the next round of voting,” Rabobank analysts wrote in a statement.
Anna Kuban contributed reporting. This story has been updated with backup data.