Recent French elections have left the country’s parliament divided, with no political faction winning a majority.
This unexpected outcome will have significant implications for both the political landscape and financial markets.
Analysts had feared that either the left-wing National Front or the far-right Rally National would win a majority, worsening France’s financial difficulties.
The global impact of the French elections
The immediate market reaction to the French election results was mixed, reflecting investor uncertainty and anxiety.
Asian markets fell, with Hong Kong’s Hang Seng Index down 1.6% and the Shanghai Composite Index down 0.9%.
Tokyo’s Nikkei stock average fell 0.3% despite the positive wages data, while Hong Kong’s Hang Seng and Shanghai Composite indexes both fell sharply.
Australia’s S&P/ASX 200 and South Korea’s KOSPI also fell slightly, reflecting concerns across the region.
In contrast, European markets were resilient, with Germany’s DAX index rising 0.7% and London’s FTSE 100 index rising 0.2%.
The CAC-40 index, which represents France’s largest companies, initially fell but then recovered to close up 0.8%.
In the US, futures for the S&P 500 and Dow Jones Industrial Average saw minimal movement, indicating investor caution.
U.S. stock markets recently hit record highs, buoyed by strong employment data, but caution has grown following the French election results.
The bond market reacted more decisively, with Treasury yields falling following the US employment data.
This has strengthened expectations that U.S. economic growth may slow and the Federal Reserve may cut interest rates.
Election results and political impact
France’s parliamentary elections resulted in a hung parliament, with the left-wing New Popular Front (NFP) emerging as the largest party with 182 seats.
President Emmanuel Macron’s centrist coalition, Ensemble, followed with 168 seats, followed by Marine Le Pen’s far-right National Rally party, which won 143 seats.
As a result of this division, no single party has a majority in the 577-seat National Assembly, leaving France in a “thick fog” of political uncertainty.
The political situation became even more complicated when Prime Minister Gabriel Attal announced his resignation.
The left’s surprise victory has raised concerns about possible fiscal instability. Jean-Luc Mélenchon, leader of the far-left Insubordinate France party within the NFP, has called on Macron to appoint a left-wing prime minister.
The changes could lead to a reversal of Macron’s pro-growth reforms and increased public spending, which is already unsettling investors.
Political gridlock is likely to make the situation worse by hindering legislative progress.
Future outlook and expert opinion
Looking ahead, political uncertainty in France is expected to continue, with significant implications for both domestic and global markets.
Holger Schmieding, chief economist at Berenberg Bank, expressed concern about the rise of the left in parliament and predicted fiscal challenges and a potential reversal of President Macron’s pro-growth reforms.
Alvin Tan of RBC Capital Markets echoed that sentiment, saying that while the worst-case scenario for the euro had been averted, fiscal balances were unlikely to improve significantly.
Investors will be closely watching the formation of a new government and its ability to pass legislation.
The chances of forming a technocratic government or a coalition between the NFP and other moderate centrist parties remain unclear.
Analysts have warned that a prolonged political deadlock could worsen France’s fiscal problems and affect investor confidence and market stability.
The coming weeks will be crucial in determining the direction of French economic policy and its wider impact on markets.
