French stocks, euro rise on election results

London
CNN
—

French stocks and the euro rose on Monday after the results first round Opinion polls in the election suggest that the far right will inflict a heavy defeat on President Emmanuel Macron but will fall short of an absolute majority in parliament.

The French CAC 40 index, which represents 40 of the largest companies listed in Paris, rose 2.7% at the open. The index closed 1% higher, but is still about 6% below its level before Macron called early elections on June 9.

Banking stocks, the economy’s bellwethers, clawed back some of the heavy losses they suffered in recent weeks. BNP Paribas shares closed up 3.6%, while Societe Generale and Credit Agricole rose 3.1% and 2.8% respectively.

Euro which He landed Following Macron’s surprise announcement that he had won the election, the British pound touched its strongest level against the dollar in more than two weeks on Monday.

Yields on French government bonds, or the returns investors demand for the risks of holding them, remained largely unchanged after widening significantly compared to their ultra-safe German counterparts in recent days. On Friday, the risk premium on German government debt reached its highest levels since the eurozone crisis more than a decade ago.

While a Macron defeat would likely be bad news for France’s fragile finances—a hung parliament could mean gridlock—the worst-case scenario for investors appears to have receded. Just two weeks ago, they were worried that France was headed for a financial crisis. Financial crisis Similar to the UK market crash in 2022 caused by unfunded tax cuts proposed by former Prime Minister Liz Truss.

After an unusual turnout on Sunday, the far-right National Rally party led by Marine Le Pen topped the first round, obtaining 33.15% of the votes, while the leftist New Popular Front coalition came in second place, obtaining 27.99%. Macron’s coalition fell to third place with 20.76%, according to the final results published by the French Ministry of the Interior on Monday.

“The outcome may be better than feared (for markets) but not as good as the situation three weeks before the election,” Mohit Kumar, Jefferies’ chief economist for Europe, wrote in a note on Monday. “The immediate reaction is like a relief rally.”

As the first round of elections approached, investors feared that voters would elect a far-right or far-left parliament committed to spending more, which would swell the country’s already high debt and budget deficit – the difference between what the government spends and what it receives in taxes.

At the end of last year, France’s government debt stood at 110.6% of GDP. The budget deficit was 1.2% of GDP. It reached 5.5% of GDP, one of the highest rates among the 27 countries of the European Union.

Sunday’s vote may have eased the risk of aggressive fiscal policies in Europe’s second-largest economy, but investors remain concerned that the new, divided parliament will not be able to address the country’s debt problem.

“It is still possible that we will see the next few years of political paralysis in France as the reform process stalls,” Kumar said, referring to Macron’s policies aimed at boosting economic growth.

Many other analysts also see a hung parliament as the most likely outcome, meaning no party would win a majority of seats.

This could lead to “stalemate,” according to Holger Schmieding, chief economist at Berenberg. “In that case, no new government would be able to accomplish much,” he wrote in a note on Monday.

It would be worse than deadlock if Le Pen’s National Rally joined with parts of the left to cut taxes and repeal some of Macron’s reforms, such as Raise the retirement age To 64 years for most workers.

The National Rally Party pledged to reduce the value-added tax on electricity, fuel and other energy products From 20% to 5.5% And Totally commented For dozens of basic necessities. At the same time, the leftist New Popular Front rose Pledge To increase the minimum wage and freeze the prices of many basic goods.

The third scenario — dubbed “Marine Meloni” — could see Le Pen follow the example of Italian Prime Minister Giorgia Meloni and focus on signature policies such as taking a tough stance on immigration while tempering “more costly or disruptive fiscal promises.” To win the presidential elections in 2027, according to Schmieding.

“The three main scenarios mentioned above imply a gradual deterioration in the outlook for France… but do not point to an immediate crisis on the scale of the Lys-Truss crisis,” he said.

In the longer term, there may be a partial rollback of some of Macron’s reforms, reducing economic growth and increasing inflation.

He added: “Along with the possibility of a credit rating downgrade, this would increase the cost of financing and exacerbate France’s financial problems over time.”

Rating agency Standard & Poor’s Reduced Fitch Ratings downgraded the French government’s credit rating in May, citing a “deterioration in its fiscal position,” although it still believes the country has sufficient capacity to repay its debts.

With the final round of voting set for July 7, the outcome of the French elections remains uncertain, as the door is still open for Le Pen’s National Rally party to win a majority.

“We doubt that this morning’s improved sentiment will continue as we head into the next round of voting,” Rabobank analysts wrote in a note.

Anna Copan contributed reporting. This story has been updated with additional information.