By Harry Robertson and Dhara Ranasinghe
LONDON (Reuters) – The euro fell and French bond futures fell after elections in the country pointed to a hung parliament, heaping fresh uncertainty on markets as a period of stagnation looms.
The euro fell around 0.2% in Asian trading to $1.0819 and longer-dated French bond futures fell 20 ticks for an implied yield of 3.13%.
Analysts said markets would likely be relieved that Marine Le Pen’s far-right National Rally (RN) party was forecast to come third, rather than winning the run-off as opinion polls had predicted.
But investors are also concerned that the left’s plans could undo many of President Emmanuel Macron’s pro-market reforms and believe a stalemate could end attempts to rein in France’s debt, which rose to 110.6% of gross domestic product in 2023.
“It seems like anti-far-right parties really got a lot of support,” said Simon Harvey, head of currency research at Monex Europe.
“But fundamentally, from a market perspective, there is no difference in terms of the outcome. There will really be a gap in terms of France’s legislative capacity.”
Cash trading in French bonds and stocks in Europe will begin on Monday morning. Movements in financial markets in general were modest. [MKTS/GLOB]
The election leaves France’s 577-seat assembly divided into three broad groups – the left, the centrists and the far right – with vastly different platforms and no tradition of working together.
Polling agencies, which are usually accurate, had predicted the left would win between 184 and 198 seats, Macron’s centrist alliance between 160 and 169 and the RN and its allies between 135 and 143. Constituency results trickled in, with most expected early Monday.
NERVES
Markets plummeted when Macron, in a surprise move in June, called parliamentary elections following the RN’s defeat in the European Parliament elections.
French stocks, led by banks, fell as investors worried about their holdings of government debt, new regulations and economic uncertainty in the euro zone’s second-largest economy.
While the prospect of a far-right prime minister has dimmed and there has been some market rally, the left has some costly proposals and is also likely to shake up relations with Europe, leaving the outlook for French assets shaky.
The leftist New Popular Front alliance, which wants to govern, says its first measures would include a 10% pay raise for civil servants, providing free school lunches, supplies and transportation, while increasing housing subsidies by 10%.
“The left’s economic programme is in many ways much more problematic than that of the right, and although the left will not be able to govern alone, the outlook for French public finances deteriorates further with these results,” said Nordea chief market analyst Jan von Gerich.
The risk premium investors demand to hold the country’s debt has hit its highest level since the eurozone crisis in 2012, as the country headed into elections and, although there has been some recovery, a period of volatility is likely to lie ahead.
“It’s going to be very difficult to get any policy passed and achieve any progressive reforms because the votes of each party are divided and no one has an absolute majority,” said Aneeka Gupta, director of macroeconomic research at WisdomTree.
However, he added: “I think the markets will be happy that we are avoiding this extreme situation with the far right.”