French Elections: how will results affect the markets? Managers react
Updated:
9 JUL, 2024
By Jose Luis Palmer from RankiaPro Europe
After a first election round which caused a significant stir, both in the political stir and in the financial markets, this weekend the second round was held with a historically high turnout. After the second round of the elections, the political landscape remains uncertain as Le Pen's desired absolute majority has vanished and a divided parliament is what this second round of elections has left us with.
As we await further clarity on the possible formation of a government in the European Union's second largest economy, asset management professionals give us their views on how the French elections will affect financial markets.
Historically high turnout to avoid Le Pen's majority
Alex Everett, Investment Manager at abrdn
For the markets, this weekend brought further relief in France as Le Pen's National Rally convincingly lost its desired absolute majority. The surprising result for the left-wing New Popular Front coalition leaves a complicated struggle for power in France.
The historically high turnout in the second round suggests strong antipathy against the prospect of a right-wing takeover. The apparent tactical vote confirms the previous week's frenzied deals between the centre and left parties.
Now that a hung parliament seems highly likely, markets can take comfort from this 'less bad' outcome. All things being equal, no significant increase in French borrowing is expected. The politics of compromise implies little change from now on, softening the excesses of either party.
Once the dust has settled, the stalemate of a divided parliament will prove more damaging than first thought. France's budgetary problems have not gone away. The September 20th deadline to present a credible deficit reduction plan is drawing ever closer. Macron's attempt to force unity has further fuelled discord. We are sceptical that significant budgetary progress can be made and continue to underweight France relative to its European peers.
Raising hopes for a 'responsible budget'
Vincent Chaigneau, head of research at Generali Investments
The second round of the French election delivered a surprise, with the National Rally winning 'just' 143 seats. RN is the third largest group in Parliament (but the biggest party), despite winning most votes in the first round. The arrangements to withdraw candidates, between the NFP (Left) and the incumbent majority Ensemble (Macron’s Renaissance+Modem+Horizon), thus proved very effective. The NFP won 182 seats, and Ensemble 168 – the latter being much more than anything that could be hoped for after the first round. In other words, Parliament is now dominated by three big blocs, left, centre and extreme right. This makes it relatively unstable, and difficult for a majority to emerge. President Macron is expected to seek an alliance with the left.
For now, he is waiting for the NFP to discuss and decide who they would like him to call as Prime Minister. On Sunday night, LFI (78 seats, largest party within NFP group) sounded uncompromising (manifesto must be applied in full), whilst the Socialists, Communists and Green (respectively 69, 9 and 28) recognised the lack of an absolute majority and hinted towards the need to behave responsibly within a coalition.
We see two main scenarios.
- A centre-left majority may emerge, with a full or relative majority, depending on developments within LFI (itself at risk of an internal crisis, as some members, like Ruffin, reject the uncompromising approach of Mélenchon). In other words, the NFP would implode. After all, it was an electoral, calculated alliance, not a 'love marriage' as Glucksmann, a key socialist figure, put it. It would be a risky bet, however, for the non-radical part of NFP to split from LFI already, with potentially poor repercussion on the next elections (2027 or before).
- A technical government, anchored at the centre. Such government would not necessarily be backed by a stable majority, but would try to gather opportunistic, and potentially varying, majorities in parliament for each law proposal.
The next parliamentary session opens on July 18th and will close on August 1st. In the meantime, President Macron may reject PM’s Attal resignation (this morning) and ask him to run the government until a new PM gets called up. Presumably, the new Parliament would topple that caretaker government on 20 July, or shortly after. The next ordinary session runs from October to June. Much time will initially be dedicated to the 2025 budget, that the new government will have presumably prepared in August-September.
Market Reaction
The market reaction has been mixed, given the prevailing uncertainty. The 10-year OAT-Bund spread is marginally tighter, at 65bp. French and European equities are opening the week positively (around +0.5% late morning). The euro opened slightly lower but has now recovered those losses (EUR/USD at 1.0840). A split parliament was our most likely scenario. This version may be slightly less toxic than initially feared, as the centrist bloc has much benefitted from the dropouts in the second round. This raises hope that a 'responsible' budget will be voted in the autumn, under the close watch of the European Commission.
That said, any coalition that may emerge will likely prove very fragile. Also, NFP and RN, which both called for an unwinding of the pension reform, are in position to make it happen, should they dare to; this would be a poor signal to the market. The electoral results reflect rather unnatural alliances, 1/ within the left bloc NFP – given the large differences of policy views – and 2/ ahead of the second round. This will make it harder to form a coalition. Even within Ensemble, the right wing (Horizon) may refuse the tax hikes that would inevitably emerge from a centre-left coalition. Even allies of E. Macron (e.g. G. Attal and E. Philippe, much looking to the 2027 presidential election) have started to distance themselves from the President. As such, the small relief rally seen through the second round (as it became clear that RN would fall short of a majority) may not see much follow-through at all. The extreme left and right have been tamed, but the electoral results do not support political stability nor a promising reform agenda.
French election poses questions for the EU as Le Pen falls short
Jamie Ross, Portfolio Manager at Janus Henderson
In the second round of the French parliamentary elections the choice became one of political paralysis or a government led by the far-right. A pact of coordination between the centre and the left was formed to reduce the chances of the latter. Arguably, this pact has been successful, but the outcome looks like a classic case of unintended consequences, where the left have ended up with more seats than expected.
The second round delivered a result today that went against wider expectations with no single party commanding a majority and taking us into a period of political wrangling as a coalition government is formed. It seems most likely that the left-wing alliance (New Popular Front: 182 seats) will be at the forefront of negotiations, alongside the centre (Ensemble Alliance: 168 seats). The surprisingly poor showing from the far-right (National Rally: 143 seats) will likely keep them from having a prominent role in these discussions.
What does this mean for policy direction? The key to likely policy direction will be the make-up of the final coalition government. In broad terms, there are two potential outcomes. The first is some sort of a broad 'grand' coalition led by the centre, bringing in representation from the left and the right. This would be seen as a favourable outcome for markets.
The second potential outcome is a coalition formed around the New Popular Front. This would be seen as a less favourable market outcome, but the balance of power within the New Popular Front would be a crucial factor. Finally, if political wrangling reaches complete deadlock, some sort of a technocratic government would be the likely outcome. This would be a benign outcome for markets. The more left the coalition is, the more the market will worry about a potential rise in government spending, a possible reversal of pension reform, price freezes, state salary increases and a worsening relationship with the EU. As we know, France already has a debt to GDP ratio above 100%, so any net increase in government spending would come under particular scrutiny.
In the long term, the events of the last few weeks are problematic from an EU perspective. A strong EU needs a strong France almost as much as it needs a strong Germany. With the political situation becoming less clear in both countries, the EU project will need new impetus. As a desk, the general view was to reduce exposure to French assets when President Macron announced his snap election, reflecting the rise i
A victory for the center
Kaspar Hense, BlueBay Senior Portfolio Manager, Investment Grade at RBC BlueBay
The result of the French elections was greatly surprising compared to the latest polls. It was expected that Macron's party would achieve a better result, but the fact that it came ahead of the National Rally can still be seen as a victory for the center.
In terms of market reaction, the stock market might focus on the current situation of political paralysis, on immobility and on the tax increase by the left. For the spreads of the European periphery, however, the situation is not so clear. The market will return to focus on European defense spending, while the excessive deficit will probably be better managed by a more pro-European government.
Populist majority could have led to fiscal shocks
Giorgio Broggi, Quantitative Analyst at Moneyfarm
The election result in France opens a scenario that is quite positive on the markets.
The most likely base case will be that of a divided Parliament which, although it will require great political efforts to create a functioning coalition, has made the markets happy.
In fact, a populist majority has been avoided, which could have led to fiscal shocks and volatility.
Majorities will be formed based on the measures
Frederic Leroux, member of the Strategic Investment Committee at Carmignac
As expected, the organization of a "republican front" opposed to the National Rally managed to prevent the rise to power of the far right, after its resounding victory in the first round of elections.
What surprised, in the second round, was the extent of the defeat of the National Rally.
The new National Assembly does not have a majority. The right-wing parties have obtained the most seats, but their main component - the National Rally - will not be able to form a coalition with the center. Meanwhile, on the left, even La France Insoumise (far left) will not be able to participate in an expanded coalition. This means that there is no room for a majority coalition between the rest of the left and the center.
The majorities will therefore be formed based on the measures to be voted on, in a context where consensus issues will be particularly rare. The most likely scenario is that of a stalemate that prevents any significant legislative initiative. France will therefore manage its daily affairs, until the next dissolution (in more than a year) or the resignation of the President of the Republic, in a context of further deterioration of public accounts.
What can we expect from the markets?
It is difficult to think that French sovereign credit will not deviate from the German one. The spread between the two, which currently fluctuates between 70 and 75 basis points, is destined to gradually rise, increasing the cost of French debt and contributing to the weakening of the national economy.
In the stock markets, despite less than 20% of the CAC40's earnings being generated in France, it is possible that asset allocations in France may be permanently reduced. The news of the dissolution of the French National Assembly had caused a uniform drop in all French stocks, showing an indiscriminate reduction in allocation to France. Now that the apparent "worst-case scenario" of the market has been averted, the best exporting companies should return to outperform the French stock market, which will suffer from a clear and lasting lack of internal dynamism.
The French situation also seems destined to contribute to the weakening of the euro, given the stalemate of the Franco-German political engine. The lack of economic initiative risks becoming "Europeanized".
Polls didn't get it right
Global Credit Team, Algebris Investments
The left-wing NFP alliance surprisingly won the second round of the French elections with 182 seats, despite polls predicting a victory for the right-wing RN. Macron's Ensemble came second with 168 seats, while RN only obtained 143 seats.
As a result, the parliament is in a stalemate situation, where no party or alliance has the majority and it is necessary to form coalitions or appoint a technocratic government. The positive aspects are that a majority for an expansive fiscal policy was not found and that pro-European parties achieved better results than expected.
However, with a coalition government, it is less likely that the fiscal tightening required by the EU will be implemented. As for the next steps, the current Prime Minister Attal will resign, although Macron may ask him to stay on as a guarantor. The Parliament will meet on July 18, allowing Macron to follow the coalition negotiations before appointing a new Prime Minister. A grand coalition between Macron's Ensemble and the centrist parties of the left and right blocs is possible.
A technical minority government to break he deadlock
Gilles Moëc, Chief Economist at AXA IM
Although the ranking of the three blocs in the final round of the French elections was a surprise compared to the first round and the polls, the most likely scenario we had been expecting since the announcement - that none of the main groups would achieve an absolute majority - has materialised. One surprise, however, is that the most extreme factions will not have the numbers to pass together a motion of censure that would prevent a "coalition of the centre" from governing. This is positive in terms of political stability for France, but forging such a coalition is likely to remain difficult. Numerically, the left, excluding the hard-left LFI, together with the centrists, could - narrowly - reach an absolute majority, but finding a political agreement will be complicated, as the left starts from a rather demanding position on economic issues.
Judging by the various statements in the TV studios on Sunday night, it seems that the left groups implicitly or explicitly 'open to dialogue' - basically the left groups that have historically had direct experience of government - want to start from a rather maximalist position to possibly extract significant concessions from the centrists on public spending, or on the recent pension reform, presenting the radical platform of the left alliance as a basis for debate.
Institutional glue' is in short supply in France's traditionally adversarial political system. A technical minority government is one option to break the deadlock, but would probably only focus on implementing 'minimalist' policies. This would minimise shocks, but would not provide much clarity on France's macroeconomic trajectory, at a time when fiscal action is needed.
With lingering uncertainty in France and lacklustre data in Germany, the ECB's continued removal of monetary tightening would be helpful. June's euro zone CPI was not worrisome - services price momentum has improved - but inflation remains at a plateau visibly above 2%, which we expect to continue into the autumn. In a context of labour market resilience, the Governing Council is unlikely to accelerate rate cuts - we continue to expect them in September and December.
French election results support European spreads, but budget worries persist
Pierre Beniguel, Manager at TwentyFour AM (Vontobel Boutique)
After weeks of volatility following President Emmanuel Macron's decision to call early elections in France, markets were breathing a sigh of relief on Monday after the far-right National Rally (RN) came in below poll forecasts.
After RN won 33% of the vote by winning the first round on 30 June, markets' main concern was that Marine Le Pen's party might emerge from the 7 July run-off with an absolute majority and an extremist programme that could have weighed on public finances and European stability.
In the end, although RN increased its number of seats to 143, it fell far short of the 289 needed for an absolute majority in the lower house, having performed far worse than the polls predicted. As a result, they are far from being able to form or even play a significant role in a future government.
Instead, it was the left-wing Nouveau Front Populaire alliance (which includes Jean-Luc Mélenchon's far-left group La France Insoumise) that won a surprise victory with 182 seats, followed by President Macron's centrist alliance, which also did better than expected with 168 seats.
With no party or coalition winning a majority, President Macron will have to appoint a prime minister who can win sufficient support in the lower house. This task will be easier said than done, given how far apart the rival coalitions' programmes appear to be. There has already been infighting within the left-wing alliance, with the more extreme La France Insoumise party calling for him to be given the post, and the leader of another part of the alliance, Les Ecologistes, inevitably rejecting this idea and insisting that the prime minister will need broader support.
For now, from the markets' point of view, the worst-case scenario of an absolute majority for RN has been avoided, and with a hung parliament it is highly unlikely that any of the more extreme parties will get enough support to push through their programmes. The fall in the spread between French and German government bonds to around 63 basis points on Monday morning was evidence of a relief rally.
However, the result does little to allay legitimate concerns about France's public finances. While it is difficult to say at this stage, the most likely outcome is that France will end up with a broad coalition tilted towards the left wing of the spectrum. While a broad coalition keeps the more extreme parties on the sidelines, it also implies a de facto stalemate, with no major legislative measure likely to gain parliamentary support for the next three years. While there are examples in other countries of this benign scenario for the markets, we have to recognise that France's budget is already in the red and is expected to remain so in the coming years.
A left-wing coalition in parliament would not help to improve the budget deficit situation. For a prime minister to be acceptable to the new parliament, Macron will almost certainly have to compromise in some way with the left. It is hard to see how this would not imply further fiscal loosening, given the left's political agenda and the fact that they were the largest electoral coalition.
We expect risk sentiment to remain weak towards French assets for the duration of the process of appointing a new prime minister, and we do not see Franco-German sovereign spreads falling back to pre-election levels, given the fiscal uncertainty. That said, French assets have already underperformed and the risk of extreme election results is now lower. The wider ramifications for European unity and stability should also be contained. From a fixed income perspective, this should be supportive of peripheral European spreads.
