French stocks, euro rise on election results

London
CNN
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French stocks and the euro rose on Monday after the election results. first round French election results suggest the far-right will inflict a heavy defeat on President Emmanuel Macron but will fall short of an absolute majority in parliament.

France’s CAC 40, which represents 40 of Paris’s biggest listed companies, rose 2.7% at the open. The index closed up 1% but is still about 6% below its level before Macron called for early elections on June 9.

Bank stocks, a bellwether for the economy, reversed some of the heavy losses they have suffered in recent weeks. BNP Paribas shares closed up 3.6%, while Societe Generale and Credit Agricole rose 3.1% and 2.8% respectively.

The euro that He fell After Macron’s surprise election win, the pound hit its strongest level against the dollar in more than two weeks on Monday.

Yields on French government bonds, or the returns investors demand for the risks of holding them, remained largely unchanged after widening significantly compared to their ultra-safe German counterparts in recent days. On Friday, the risk premium on German government debt reached its highest levels since the eurozone crisis more than a decade ago.

While Macron’s defeat is likely to be bad news for France’s fragile finances – a hung parliament could mean gridlock – the worst-case scenarios for investors appear to have subsided. Just two weeks ago, they were concerned that France might be heading into a financial crisis. Financial crisis Similar to the UK market crash in 2022 caused by unfunded tax cuts proposed by former Prime Minister Liz Truss.

After an unusually high turnout on Sunday, Marine Le Pen’s far-right National Rally party came first in the first round, taking 33.15 percent of the vote, while the leftist New Popular Front coalition came in second with 27.99 percent. Macron’s coalition dropped to a dismal third with 20.76 percent, according to final results released by the French interior ministry on Monday.

“The outcome may be better than feared (for markets) but not as good as the situation three weeks before the election,” Mohit Kumar, Jefferies’ chief economist for Europe, wrote in a note on Monday. “The immediate reaction is like a relief rally.”

Going into the first round, investors feared that voters would elect a far-right or far-left parliament committed to spending more, further ballooning the already high debt and budget deficit – the difference between what a government spends and what it receives in a year. Taxes.

At the end of last year, French government debt reached 110.6% of GDP. Budget deficit reached 5.5% of GDP, one of the highest rates among the 27 countries in the European Union.

Sunday’s vote may have eased the risk of aggressive fiscal policies in Europe’s second-largest economy, but investors remain concerned that the new, divided parliament will not be able to address the country’s debt problem.

“It is still possible that we will see the next few years of political paralysis in France as the reform process stalls,” Kumar said, referring to Macron’s policies aimed at boosting economic growth.

Many other analysts also see the most likely outcome as a hung parliament, meaning no single party would get a majority of seats.

That could lead to a “dead end,” according to Holger Schmieding, chief economist at Berenberg. “In that case, no new government would be able to accomplish much,” he wrote in a note on Monday.

It would be worse than gridlock if Le Pen’s National Rally movement joins parts of the left to cut taxes and undo some of Macron’s reforms, such as Raising the retirement age To 64 years for most workers.

The National Rally Party pledged to reduce the value-added tax on electricity, fuel and other energy products. From 20% to 5.5% And Totally commented In order to obtain many basic necessities. At the same time, the New Left Popular Front declared Pledge To increase the minimum wage and freeze the prices of many basic commodities.

The third scenario — dubbed “Marin Meloni” — could see Le Pen follow the lead of Italian Prime Minister Giorgia Meloni and focus on signature policies like a tough stance on immigration while toning down “more costly or disruptive fiscal promises” to win the 2027 presidential election, Schmieding said.

“The three main scenarios above imply a gradual deterioration in the outlook for France… but do not point to an immediate crisis on the scale of Liz Truss,” he added.

In the long run, there may be a partial rollback of some of Macron’s reforms, leading to lower economic growth and higher inflation.

He added: “Along with the possibility of a credit rating downgrade, this would increase the cost of financing and exacerbate France’s financial problems over time.”

Rating agency Standard & Poor’s His level has been downgraded. Fitch Ratings downgraded the French government’s credit rating in May, citing a “deterioration in its fiscal position,” although it still believes the country has sufficient capacity to repay its debts.

With the final round of voting scheduled for July 7, the result of the French elections is still uncertain, as the door is still open for the National Rally led by Le Pen to win a majority.

“We suspect that the improvement we saw this morning in sentiment will continue as we head into the next round of voting,” Rabobank analysts wrote in a note.

Anna Copan contributed to this report. This story has been updated with additional information.