Marine Le Pen's National Rally leads the election race with 33% of votes. Analysts predict a hung parliament as the most probable outcome, probably resulting in moderate fiscal policies and reduced market volatility.
ADVERTISEMENTThe first round of the French legislative elections has concluded with Marine Le Pen's National Rally securing 33% of the votes, leading over the left-wing bloc's 28% and President Emmanuel Macron's centrist alliance, which garnered 22%.
As the nation heads towards the second round of voting on July 7, the possibility of forming France's first far-right government since World War II looms, with 28-year-old Jordan Bardella poised to become Prime Minister.
The key question is whether the far-right will achieve an absolute majority, a scenario that would significantly impact French fiscal policy and market stability.
Initial market reactions suggest that investor fears over a far-right dominance have somewhat diminished. The French CAC 40 Index opened more than 2% higher on Monday, before trimming gains to 1.3% by 2.30 pm (CET).
The yield on the 10-year French OAT inched up by just 2 basis points to 3.32%, yet the spread versus the bund tightened by 6 basis points (bps) to 74bps.
The market's cautious optimism reflects a broader consensus that a hung parliament is the most likely outcome, averting the extremes of fiscal policy shifts.
However, the potential for significant change persists, with both national and European markets keenly awaiting the final results next week.
Market reactions and analyst insights
BBVA's chief strategist Alejandro Cuadrado highlighted the potential market implications of a far-right majority. He remarked: "In the event of Marine Le Pen's National Rally (RN) winning an absolute majority, the EUR could face additional short-term headwinds."
Cuadrado explained that the RN's less comfortable victory in the first round, securing approximately 33.2% of the votes—three percentage points less than some polls indicated—reduces the likelihood of an absolute majority.
He also noted that left-wing parties might withdraw their candidates in certain districts to consolidate votes against RN, potentially leading to a hung parliament.
Such a scenario would hinder significant legislative changes, preventing further fiscal imbalances and stabilising the EUR.
Danske Bank analysts predict a 55% chance of a hung parliament, leading to a government reliant on ad-hoc legislative support, necessitating compromises.
Given the division in the French parliament, Danske Bank finds it unlikely that the new government can garner support for any substantial increases in spending.
"Public spending in France is not set to rise significantly", they stated, projecting that the 10-year yield spread between France and Germany would tighten to 40-60 basis points within three months as fears of increased spending subside.
In a scenario where Le Pen's party secures an absolute majority, Danske Bank analysts anticipate a gradual implementation of their programme, with no immediate large increases in public spending.
According to the Danish institution, the ambitions of turning fiscal policy substantially more expansionary would be dampened by the risk of exclusion from European Union and European Central Bank support programmes or adverse financial market reactions.
Hence, even in this scenario, Danske Bank expects the 10-year yield spread to tighten to 50-60 basis points within three months.
In the less likely scenario where the left-wing New Popular Front (NPF) coalition wins an absolute majority, Danske Bank predicts an increase in public spending and potential confrontations with the EU. This scenario could cause the spread between French and German 10-year yields to increase significantly to 100-150 basis points within three months, reflecting heightened market concerns.
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Luca Cigognini, market strategist at Intesa Sanpaolo, observed that the lack of an absolute majority for Le Pen's party in the first round has strengthened the EUR/USD. Despite this rebound, Cigognini cautioned that it is insufficient to signal a fundamental shift in sentiment towards the single currency.
Philippe Ledent, a senior economist at ING Group, noted that while RN leads in 297 constituencies with 37 candidates directly elected, achieving an absolute majority would require all first-round votes to carry over to the second round, a challenging prospect. "Marine Le Pen's Rassemblement National party is still best placed to win an absolute majority, but the die is far from cast," he explained.
Ledent further warned that a far-right government could destabilise French institutions and introduce economically disruptive measures. He emphasised that the left-wing coalition's chances of securing an absolute majority are slim, relying heavily on third-place candidate withdrawals and significant electoral vote transfers.
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