French stocks experienced an uptick on Monday as investors found relief in the lack of a clear winner in the recent elections, speculating that significant policy changes are unlikely amid governmental deadlock.
The CAC 40 Index climbed 0.4%, recovering from an early dip, alongside a broader European market rally. Although the spread between French and German 10-year bonds remains wider than before the election, indicating ongoing concerns about France’s debt, it has narrowed recently. This suggests that investors believe neither the far right nor the far left will be able to push through major spending plans. French bonds remained stable with the 10-year yield at 3.2%, and the euro steadied near 1.084 against the dollar after a seven-day rise.
“It’s unlikely radical reforms will come through,” stated Alexandre Hezez, Chief Investment Officer at Group Richelieu. “Without structural reforms on spending, the wide spread on French debt will persist. However, for other asset classes, this scenario triggers fewer changes.”
Following Sunday’s final round of voting, France is poised for a prolonged period of political negotiations. The left-wing alliance, although holding the largest number of seats in the lower house, lacks an outright majority. President Emmanuel Macron’s party came second, with Marine Le Pen’s National Rally in third place.
Investors had been concerned about a potential government led by Le Pen, but the left’s success introduces new uncertainties. Despite this, the left alliance’s lack of an absolute majority limits its ability to implement extensive changes, leading some strategists to view a hung parliament as a favorable outcome for the market.
The gap between 10-year French and German yields, a measure of credit risk, is now around 65 basis points, down from the peaks during last month’s market turmoil. “If there is no government capable of taking action, it might not be so bad, as the reforms would not be rolled back and no tax giveaways would be handed out,” said Edgar Walk, Chief Economist at Metzler.
The New Popular Front — including Socialists and far-left France Unbowed — won 178 seats, according to the Interior Ministry. Marine Le Pen’s National Rally secured 143 seats, while Macron’s centrist alliance obtained 156.
French markets had plunged in June, erasing billions of euros in value as Macron’s snap poll raised fears of far-right dominance. However, losses were mitigated last week as polls suggested the National Rally would not achieve a majority. The CAC 40 Index regained about half its post-announcement losses.
Investors had been most concerned about a potential absolute majority for the left, which was deemed unlikely after Le Pen’s National Rally dominated the first round. The left coalition has pledged to reverse seven years of pro-business reforms and increase the minimum wage, with their campaign promises estimated to require nearly €179 billion ($194 billion) annually.
France’s budget deficit, already at 5.5%, far exceeds the EU’s 3% limit. The IMF predicts that without additional measures, debt will rise to 112% of GDP by 2024, increasing annually by about 1.5 percentage points. S&P Global Ratings downgraded France in May, citing missed fiscal targets post-COVID and energy crisis spending.
Vincent Juvyns, Global Market Strategist at J.P. Morgan Asset Management, noted potential tensions as Macron’s reforms are now in jeopardy, possibly affecting French bond values relative to peers. “Markets may demand a higher spread until the new government clarifies its fiscal stance,” he remarked. “The European Commission and rating agencies are expecting cuts, but the government faces a party wanting to increase spending significantly.”
