How cruel a hung parliament in France could be for markets

Early signals on Sunday night for the French parliamentary run-off vote produced some big surprises, with political commentators considering a “hung parliament” situation that could be challenging for both policymaking and financial markets.

According to some estimates, France’s leftist Democratic Front coalition is set to gain the most seats in the election, with French President Emmanuel Macron’s Ensemble party and its allies on the playing field, and the arrival of the far-right Rassemblement National. with. third. Since no team is expected to reach the 289 seats required for an absolute majority, a standoff could occur in the coming weeks.

euro slipped about 0.3% towards American greenback An exemption has been given to businesses close to advance voting on Sunday night.

Ahead of the second round of voting, Citi analysts warned that the hold market could be somewhat positive with respect to the French election and that a “high probability outcome” equivalent to a deadlock would be somewhere between 5–20%. “Low equity market valuations.”

“Combined with our finding that French equities tend to be more volatile than their peers around elections, there may be reason to expect additional volatility from here…For context, French equities are up 10% The move usually occurs with a move of 8% overall. stoxx 600“The analysts noted in a notice dated June 26.

Analysts at funding firm Daiwa Capital Markets also expressed uncertainty if the dissenting party managed to win an absolute majority. In an analysis note before this date, analysts said that a grand coalition of moderate left and center parties, a cohesive government or a minority government were all possible outcomes.

“Regardless, uncertainty about the outlook for French policymaking is likely to persist for a long time,” the analysts noted.

The tax and budget plans of the leftist Popular Front and the hard-right National Rally (RN, or Nationwide Rally) party were a major cause of resentment since the snap elections were announced.

France faces a challenging fiscal situation, and the ECU Commission announced two weeks ago that it aimed to place France under a high inadequacy procedure due to failure to accumulate its budget deficit within 3% of GDP. Have to play. , The EDP is a resolution introduced by the European Commission against any EU member state that exceeds the budgetary insufficiency threshold or fails to surrender its outstanding funds.

“A fractured parliament means it will be difficult for any government to pass budget cuts that would make it difficult for France to follow EU budget rules and keep its public debt sustainable,” said Jack Allen-Reynolds, deputy head of the euro zone. It is necessary to get on the path.” Capital Economics economists immediately noted in a notice that advance polls have been exempted.

“The likelihood of the French government (and the governments of other countries) clashing with the EU over fiscal policy has increased now that the bloc’s budget rules have been re-introduced and several countries, including France and Italy, have been placed in extreme Fixed deficit processes,” he said.

There has been panic in the French bond market in recent weeks. The country’s lending rates, which are the highest compared to Germany, have recently been buying and selling at their best levels since 2012.

France’s benchmark 10-year executive bond handover also surged above 3.3%, its highest level in more or less 12 months, since a snap election was called by Macron during June.

David Roche, president and international strategist at Isolated Techniques, said in a note on Sunday that early signs of a victory for the leftist coalition may actually be worse economically than the National Rally executive. He noted that any joy from preventing an outright victory for the far-right RN would probably be modest and would actually be helpful in shorting French executive bonds in contrast to German bonds “where the spread is only 70 basis points.”

Shorting involves betting that the cost of an asset will fall.

“This is a hung parliament with some kind of shaky coalition negotiated by a disgraced president but with no policy agenda,” he said.

Holger Schmieding, chief economist at Berenberg Locker, sees a hung parliament as the most likely and least unfavorable scenario since Macron was the first to call the election.

“However, to put it mildly, this is still not a good result. It signals the end of Macron’s pro-growth reforms. Any government, even if it is still led by current Prime Minister Gabriel Attal – Or perhaps by a candidate who is more favorable to the centre-left – who will struggle to do much,” his group of analysts noted in a contemporary analysis notice.

Shane Oliver, chief economist and head of investment strategy at AMP, said a hung parliament would do no good when it comes to reforms and reducing inefficiencies. However, he noted, this could be the least bad outcome for markets open to scrutiny “as it would reduce the likelihood of conflict over fiscal policy and put a stop to extremist NR policies.”

—CNBC’s Jenny Reed and Holly Elliott contributed to this newsletter.