By Harry Robertson and Dhara Ranasinghe
LONDON (Reuters) – The euro fell and French bond futures tumbled after French elections showed parliament in limbo, casting fresh uncertainty on markets as a period of deadlock looms.
The euro fell about 0.2 percent to $1.0819 in Asian markets, while longer-dated French government bond futures fell 20 ticks to a forecast yield of 3.13 percent.
Analysts said markets would likely be relieved that Marine Le Pen’s far-right National Rally (RN) party was projected to come third in the second round, rather than winning as opinion polls had predicted.
But investors worry the leftist plan risks undoing many of President Emmanuel Macron’s pro-market reforms and believe the impasse could spell the end of France’s efforts to rein in debt, which hit 110.6 percent of gross domestic product in 2023.
“It looks like the anti-far-right parties have really garnered a lot of support,” said Simon Harvey, head of currency analysis at Monex Europe.
“But from a market point of view, the outcome would be fundamentally different. It would create a real vacuum in terms of French legislative capacity.”
Spot trading of French bonds and shares begins in Europe on Monday morning. Financial markets overall were calm. [MKTS/GLOB]
The election left France’s 577-seat parliament divided into three main groups – the left, the centre and the far right – with vastly different policies and no tradition of cooperation whatsoever.
Polling agencies have been generally accurate in their predictions, predicting that the left will win 184 to 198 seats, Macron’s centrist coalition will win 160 to 169 seats, and the RN and its allies will win 135 to 143 seats. Constituency results are trickling in, with most due by early Monday morning.
anxiety
Markets plummeted in June after Macron called for parliamentary elections in a shock move following his party’s crushing defeat to the RN in the European elections.
French stocks, led by banks, fell as investors worried about government debt holdings, new regulations and economic uncertainty in the euro zone’s second-largest economy.
Markets have recovered slightly as prospects of a far-right prime minister have faded, but the left has some expensive proposals that would likely upset ties with Europe, leaving the outlook for French assets uncertain.
The left-leaning New Popular Front coalition, which is seeking to take power, has proposed a 10% pay increase for civil servants, free provision of school lunches, supplies and transport, and a 10% increase in housing subsidies as initial measures.
“The left’s economic policies are in many ways much more problematic than those of the right. The left will not be able to govern alone, but this result makes France’s fiscal outlook even worse,” said Jan von Gerick, chief market analyst at Nordea.
As the country heads into a general election, the risk premium investors are demanding to hold its bonds has reached its highest level since the 2012 eurozone crisis, and although there has been some recovery, volatility is likely to continue.
“With the party votes being split and no party having an absolute majority, it’s going to be very hard to actually pass policies and get progressive reforms through,” said Aneeka Gupta, director of macroeconomic research at WisdomTree.
But she added: “I think the markets will be happy that this extreme situation with the far right has been averted.”
(Reporting by Harry Robertson and Dara Ranasinghe; Additional reporting by Tom Westbrook in Singapore; Editing by Elisa Martinuzzi, Frances Kerry and Himani Sarkar)
