French stocks and the euro surged after the election results

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The Euronext building in Paris, which will host the Paris Stock Exchange in June 2024.


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French stocks and the euro rallied after the results on Monday First round Polls suggest the far-right will inflict a heavy defeat on President Emmanuel Macron, but will not win an outright majority in parliament.

France’s CAC 40 index, which represents the 40 largest companies listed in Paris, rose 2.7% at the open. The index closed 1% higher on the day, but is nearly 6% below its level before Macron called a snap election on June 9.

Bank stocks, a bellwether for the economy, reversed some of their biggest losses in recent weeks. Shares in BNP Paribas rose 3.6%, while Societe Generale and Crédit Agricole rose 3.1% and 2.8% respectively.

Euro, it is fell The dollar briefly touched its strongest level against the dollar in more than two weeks on Monday after Macron’s surprise election announcement.

Yields on French government bonds, or the return investors demand for the risk of holding them, were broadly unchanged in recent days after widening significantly relative to their ultra-safe German equivalents. On Friday, the risk premium on German government debt hit its highest level since the eurozone crisis in more than a decade.

While Macron’s defeat could be bad news for France’s precarious finances — a hung parliament means gridlock — the worst-case scenarios for investors appear to have receded. Two weeks ago, they worried about the possibility of going to France A financial crisis Similar to the 2022 UK market crash triggered by unfunded tax cuts put forward by former Prime Minister Liz Truss.

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After an unusually high turnout on Sunday, Marine Le Pen’s far-right National Rally party led in the first round, with 33.15% of the vote, while the left-wing New Popular Front coalition came second with 27.99%. According to final results released on Monday by France’s interior ministry, Macron’s coalition fell to the worst third place with 20.76%.

“The outcome will be better (for markets) than feared, but not as good as the pre-election situation three weeks ago,” Jefferies chief economist for Europe Mohit Kumar wrote in a note on Monday. “The immediate reaction was one of relief rallying.”

Going into the first round, investors feared they would elect a far-right or left-wing parliament committed to spending more, and the country’s already high debt and budget deficit – the difference between what the government spends and what it receives. Taxes.

At the end of last year, France’s government debt stood at 110.6% of GDP. Budget deficit reached 5.5% In terms of gross domestic product, it is one of the 27 countries in the European Union.

Sunday’s vote may have eased the risk of extreme fiscal policies in Europe’s second-largest economy, but investors still worry that a new, divided parliament will not be able to tackle the country’s debt problem.

“We could still see political paralysis in France for the next few years, stalling the reform process,” Kumar said, referring to Macron’s policies aimed at boosting economic growth.

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

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That could lead to “gridlock,” according to Berenberg’s chief economist Holger Schmiding. “In this case, no new government will do much,” he wrote in a note on Monday.

Le Pen’s national rally is worse than gridlock if it joins parts of the left to cut taxes and reverse some of Macron’s reforms. Raising the retirement age Most workers are up to 64 years of age.

The National Rally has promised to reduce value added tax on electricity, fuel and other energy products 20% to 5.5% And Stop it altogether For many basic needs. Meanwhile, there is the left-wing New Popular Front He promised Raise the minimum wage and freeze the prices of many essential commodities.

A third scenario – dubbed “Marine Meloni” – would see Le Pen follow the example of Italian Prime Minister Giorgia Meloni and focus on signature policies such as a tough stance on immigration while watering down “too expensive or disruptive financial promises”. According to Schmiding, the 2027 presidential election should be won.

“The three main scenarios above make the outlook for France progressively worse…but they do not point to an imminent Lis-Truss-style crisis,” he said.

In the long run, some of Macron’s reforms could backfire somewhat, slowing economic growth and raising inflation.

“With the prospect of (credit) ratings downgrading, this will increase the cost of financing and exacerbate France’s financial woes over time,” he added.

Ratings agency S&P Downgraded The French government’s debt assessment in May cited “(its) deteriorating budgetary position” and said it still considers the country’s ability to repay its debts sufficient.

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With the final round of voting set for July 7, the outcome of the French election remains uncertain, leaving the door open for Le Pen’s National Rally to win a majority.

“We are skeptical that this morning’s sentiment improvement will continue as we head into the next round of polls,” Rabobank analysts wrote in a note.

Anna Kuban reports. This story has been updated with additional information.

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