From left to right: the president of the far-right French party Rassemblement National, Jordan Bardella, the French Prime Minister Gabriel Attal and the French MP of the left-wing La France Insoumise party, Manuel Bompard, before a political debate broadcast on June 25, 2024 on the French TV channel TF1.
Dimitar Dilkoff | Afp | Getty Images
French shares rose in relief on Monday morning after results from the first round of snap elections raised expectations of a stalemate in parliament.
The far-right Rassemblement National party and its allies won 33.1% of the vote, the left-wing NFP alliance was in second place with 28% and Macron's coalition won 20%, the French Interior Ministry said on Monday.
The French benchmark CAC-40 The index was up 1.3% at 10:17 a.m. London time, down from previous highs of more than 2.5%.
“Ultimately, the elections tell us much the same thing we already knew, namely that the most likely scenario remains a parliament with a stalemate,” Sebastian Paris Horvitz, director of research at La Banque Postale Asset Management, told CNBC's “Squawk Box Europe.”
From a market perspective, that's the “least bad” option, he added, though it's far from ideal. “In general, you have a majority to govern France… After the second round, we may not have a majority anymore. And so we have to figure out how France is going to be governed.”
CAC 40 index.
This comes after economists at Citi and elsewhere warned that an outright victory for the far-right or left-wing alliance could cause a serious shock to markets given their tax and spending plans, potentially triggering a debt crisis.
“A deadlocked parliament seems likely and, in our view, would be seen as a positive development for European assets as markets would then price in tax and immigration policies that are more akin to the status quo,” he said. Matthew Ryan, head of market strategy at financial services firm Ebury, said in a note on Monday.
“After their strong showing in the first round, the possibility of a majority for National Rally remains, which could limit the Euro's gains in the coming days.”
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The second round of voting will take place on July 7, and to gain a majority, Rassemblement National needs to win 289 of the 577 seats in the National Assembly, the lower house of the French parliament.
The current candidates now have until Tuesday evening to confirm whether they will advance to the final round. Some left-wing and centrist candidates who finished in third place in their local races are expected to drop out to avoid a divided vote, in an effort to curb the far right's gains. This has increased the uncertainty about the end result.
The key question remains who will become prime minister, a position currently held by Gabriel Attal, an ally of President Emmanuel Macron.
National Rally hopes it will be the party’s 28-year-old leader, Jordan Bardella. Given that Macron has previously indicated that he plans to serve out the remainder of his term as president until 2027, this would lead to a “cohabitation” scenario in which the two roles are at odds with each other.
Even in a hung parliament – where no party has an overall majority, making it difficult to pass bills and implement a broad agenda – the French constitution allows for the continuation of the current budget, so areas such as pension payments are not destabilized, Horvitz said.
“Yet there is no question of reform,” he continued, noting that this is a critical time for Europe as it faces defense threats, the energy transition and weak French and German economic growth.
Horvitz added that French borrowing costs, which have been elevated relative to Germany's since the election, are likely to remain high, leading to continued pressure on bond-linked assets including bank stocks and some utilities, he said.
French 10-year bond yields hit their highest level since November 2023 on Monday, trading around 3.334%, although their spread with German bond yields narrowed after hitting a 12-year high on Friday.
