French stocks and the euro boosted by election results | CNN Business

London
CNN
 — 

French stocks and the euro rallied Monday after results from the first round of elections suggested the far right will inflict a heavy defeat on President Emmanuel Macron but fall short of winning an outright majority in parliament.

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

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

The euro, which tumbled after Macron’s surprise election announcement, briefly touched the strongest level against the dollar in more than two weeks Monday.

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

While the defeat for Macron is likely bad news for France’s precarious finances — a hung parliament could mean gridlock — the worst-case scenarios for investors appear to have receded. Just two weeks ago, they were fretting about the possibility that France could be heading for a financial crisis similar to the 2022 UK market crash triggered by unfunded tax cuts pushed by former Prime Minister Liz Truss.

After unusually high voter turnout Sunday, Marine Le Pen’s far-right National Rally party led the first round, clinching 33.15% of the vote, while the left-wing New Popular Front coalition came second with 27.99%. Macron’s Ensemble alliance slumped to a dismal third with 20.76%, according to final results published Monday by France’s Interior Ministry.

“The result is probably better than feared (for markets) but not as good as the status three weeks ago pre-elections,” Mohit Kumar, Jefferies chief economist for Europe, wrote in a note Monday. “The immediate reaction is one of 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 swelling the country’s already-high debt and budget deficit — the difference between what the government spends and what it receives in taxes.

At the end of last year, France’s government debt amounted to 110.6% of gross domestic product. The budget deficit reached 5.5% of GDP, one of the highest among the 27 countries in the European Union.

Sunday’s vote may have tempered the risk of extreme fiscal policies in Europe’s second-largest economy, but investors are still concerned that a new, divided parliament won’t be able to tackle the country’s debt problem.

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

Several other analysts also view a hung parliament as the most likely outcome, which would mean no single party holds a majority of seats.

That could result in “gridlock,” according to Berenberg chief economist Holger Schmieding. “In this case, any new government would not get much done,” he wrote in a note Monday.

Worse than gridlock would be if Le Pen’s National Rally joined forces with parts of the left to cut taxes and reverse some of Macron’s reforms, such as raising the retirement age to 64 years for most workers.

The National Rally has pledged to slash value-added tax on electricity, fuel and other energy products from 20% to 5.5% and suspend it entirely for scores of basic necessities. Meanwhile, the left-wing New Popular Front has pledged to increase the minimum wage and freeze prices for many essential goods.

A third scenario — dubbed “Marine Meloni” — could see Le Pen follow the example of Italy’s Prime Minister Giorgia Meloni and concentrate on signature policies such as a tough stance on immigration while watering down “more expensive or disruptive fiscal promises,” with a view to winning the 2027 presidential election, according to Schmieding.

“The three main scenarios above entail a gradual worsening of the outlook for France… But they do not point to an immediate Liz-Truss style crisis,” he said.

In the long term, there could be a partial reversal of some of Macron’s reforms, reducing economic growth and raising inflation.

“Coupled with the prospect of (credit) ratings downgrades, this would add to financing cost and exacerbate France’s fiscal woes over time,” he added.

Ratings agency S&P downgraded the French government’s credit rating in May, citing the “deterioration of (its) budgetary position,” though it still thinks the country has ample capacity to repay its debts.

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

“We are doubtful this morning’s improvement in sentiment will be maintained as we head into the next round of voting,” Rabobank analysts wrote in a note.

Anna Cooban contributed reporting. This story has been updated with additional information.