Markets surge on expectation that Le Pen will lose second round of French vote

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The first round of France’s election showed Marine Le Pen’s far-right Rally National party may not secure enough votes to win an absolute majority, raising the possibility of a hung parliament. The result boosted the euro, which opened Monday’s Asian session higher against most other G10 currencies as investors were relieved of the serious economic and political turmoil that could have occurred if Le Pen’s party had monopolized power.

A divided Congress

Voter turnout in France’s elections last weekend rose to 59.4% from 39.4% two years ago, the highest turnout since 1986. Projections from the first round of voting on Sunday showed Marine Le Pen’s far-right Rally National (NR) party winning 33% to 34.2% of the national vote, followed by a left-wing coalition with 28.5% to 29.6%, and President Emmanuel Macron’s centrist bloc garnering 21.5% to 22.4% support.

Based on the results, the NR could win between 230 and 315 seats, the New Popular Front between 115 and 200, and Macron’s centrist coalition between 60 and 120. This would be the first time in history that the far right has gained such political power in France.

However, Le Pen’s party still lacks a majority in the National Assembly, making it difficult for the bill to pass. This may leave France in a state of political uncertainty, but a second round of elections scheduled for July 7 will determine the country’s future. If the National Party does not secure enough seats to gain absolute power in parliament, negotiations between the parties in the runoff election will determine the outcome.

Still, this may be the best outcome for European markets and the euro, as the French far-right did not receive as much support as expected. A hung parliament scenario means no party can overturn legislative power, reducing the threat to France’s fiscal stability. It also gives President Macron time and opportunity to change course in elections three years from now.

European markets end June lower, but volatility continues

Major European stock markets ended June on a negative note due to political unrest. The sell-off in French stocks was particularly pronounced, with the CAC 40 down 6.42% last month. The Euro Stoxx 600 fell 2.08% and the DAX lost 1.42% in June. As a result, the Euro weakened against most other G10 currencies as the EU parliamentary elections saw the rise of far-right forces. European stock markets and the Euro are expected to remain volatile over the coming week due to uncertainty surrounding the final outcome of the French elections.

Risk aversion may still dominate market sentiment, as evidenced by the spread between French and German 10-year bond yields surging again to 81.1 basis points on Friday, the highest since 2012. In times of crisis, German bunds are seen as Europe’s safe haven, leading to a widening yield gap between the two countries’ benchmark bonds.

Selling French government bonds

At the same time, investors appear to be selling French government bonds amid concerns that the rise of a far-right party could undermine France’s ability to manage its public debt. Marine Le Pen’s policies, which advocate anti-immigration policies, tax cuts and a lower retirement age, are expected to significantly widen the government’s budget deficit.

There are also concerns that potential economic turmoil could spread across the eurozone. Last week, the German government called off a joint bond issue to support defense systems, citing political turmoil in France. Moreover, the rise of the far-right could discourage foreign investment and hinder France’s technological progress in Europe, posing a risk to President Emmanuel Macron’s ambitious plans to attract up to 15 billion euros in investment, particularly in technology, artificial intelligence and pharmaceuticals.

Despite growing risks in France, the ECB does not see a need to intervene in the French bond market, with lawmakers stressing that it is primarily within the competence of French politicians to resolve the turmoil in the French market.