(Bloomberg) — French markets rose and the euro strengthened as Marine Le Pen’s party is expected to win the first round of France’s parliamentary election by a smaller margin than some polls had predicted, reducing the far-right’s chances of securing an absolute majority.
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CAC 40 stock futures rose 2.8% at the open and the euro rose 0.4% to $1.0757, while bond futures posted smaller gains and French 10-year bond yields pointed to a 2 basis point decline.
Initial projections had suggested Le Pen’s far-right party would lead President Emmanuel Macron’s centrist coalition and the left-leaning New Popular Front, but it may fall short of the votes needed to secure an absolute majority in the second round on July 7.
Investors worry that a strong showing by Le Pen’s National Rally would increase the likelihood of expansionary fiscal policy, highlighting the country’s bloated budget balance and further clouding the prospects for a common currency.
“The fall this morning didn’t seem real because the fear was already priced in by the market,” said Stephane Ecolo, equity strategist at TFS Derivatives. “My concern in France after the election is a Liz Truss-like event and a stress explosion on French government bonds.”
The focus now shifts to whether the party can muster enough support by July 7 to secure an absolute majority in the National Assembly, which would make it easier to pass legislation. President Emmanuel Macron and other opponents are already developing a strategy to keep the far-right party out of power, and any signs of progress are likely to strengthen the case for a rescue rally.
“We’re looking at a week of maneuvering,” said Joachim Clement, head of strategy, accounting and sustainability at Liberum Capital, adding that he expects the euro to rise throughout the week as coalitions work to reduce the vote share of Le Pen’s party.
Bloomberg strategists say…
If the Left coalition “aims to prevent Le Pen’s group from winning a majority in the crucial second round of voting, that would have far-reaching implications for Franco-German inequality and for the euro. If the result is a more centrist government, it would be a positive for the currency and herald a narrowing of inequality.”
— Ben Lamb, Cross-Asset Strategist at MLIV
An analysis of five pollsters late Sunday projected the caucus to receive 34% of the vote. A final Bloomberg poll conducted on Friday showed the caucus receiving 36.2% of the vote.
Projections on Sunday showed the left-wing New Popular Front coalition likely to get around 29% of the vote, while Macron’s centrist coalition is expected to get between 21% and 22%.
“Both sides’ fiscal policies have a confusing impact on the outlook for the French economy and French debt,” said Vincent Juvins, global market strategist at JPMorgan Asset Management, referring to the National Rally party and the New Popular Front coalition. “For me, it’s still a wait-and-see approach.”
According to Kathleen Brooks, research director at XTB, the French market is likely to recover if the alliance being formed to stop Le Pen’s absolute power begins to gain credibility.
“A hung parliament could make it harder to get anything done in France with the current parliament, which is exactly what the markets want,” she said.
Still, strategists warn that the road ahead is likely to be more volatile as parties strategically choose not to field candidates in certain districts to boost centrist candidates, and runoff elections complicate electoral math.
Volatility is the only certainty for traders analyzing France results
Markets plummeted after Macron’s decision to hold an early vote in early June.
His party, which supports deep spending cuts to rein in France’s budget deficit, suffered a major defeat in European elections, while the Rally National has pushed for costly budget measures such as lower sales taxes on energy and fuel.
Over the past two weeks, the yield investors are demanding for 10-year French government bonds over safer German government bonds has surged to more than 80 basis points, a level last seen during the euro zone’s sovereign debt crisis, and the euro has fallen to its lowest since early May.
Financial pressures
Peter Goves, head of developed market government research at MFS Investment Management, said the 10-year yield spread may ease somewhat as trading opens on Monday, but he doesn’t expect a “significant and sustained recovery.”
“Uncertainty is high, the fundamental situation in France has not changed and the situation is complicated by a number of three-way disputes, with the final outcome still unclear and unpredictable,” he said.
France’s budget deficit is forecast at 5.3% of GDP this year, already well above the 3% of GDP allowed under European Union rules. Without further action, the International Monetary Fund projects that debt will rise to 112% of GDP in 2024, rising by about 1.5 percentage points per year over the medium term.
–With assistance from Allegra Catelli, Julien Ponthus, and Farah Elbahrawy.
(We will update market movements.)
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