French shares wobble after far-left surprise election success

French markets were volatile on Monday morning after France’s far-left coalition party scored a surprise victory in Sunday night’s legislative election.

After a modest drop in early trading, shares in the CAC 40 staged a strong comeback, only to fall sharply just before 11:00 CET. Prices have since fluctuated on a downward trajectory.

This, despite surprisingly little movement in the French bond market, where the 10-year yield is around 3.2%.

The latest poll projections suggest the left-wing New Popular Front (NFP) alliance has won 182 of the 577 seats in France’s National Assembly after Sunday’s vote.

Incumbent Macron’s centrist alliance is set to take 168 seats, while the far-right RN, meanwhile, is projected to secure just 143 seats. This is contrary to earlier predictions that the party could win an absolute majority.

“It looks like the anti-far-right parties really got a lot of support,” said Simon Harvey, head of FX analysis at Monex Europe, quoted by Reuters.

“But basically from a market perspective, there is no difference in terms of the outcome. There will really be a vacuum when it comes to France’s legislative capacity.”

French politicians are at an impasse

After markets fell after snap legislative elections were announced last month, shares made some gains in the week before the election, boosted by predictions that the RN would not secure an absolute majority.

Now, as France looks ahead to a hung parliament, the market is struggling against political uncertainty.

Since none of the parties managed to secure a majority of 289, the groups will have to form coalitions to avoid legislative deadlock.

In practice, this possibility seems unlikely, as politicians from the center Ensemble party will hardly be comfortable with the connection with the extreme left.

Writing in X on Monday morning, finance minister and Macron ally Bruno Le Maire was bullish on the NFP victory.

“The most immediate risk is a financial crisis and the economic collapse of France,” he warned.

“The implementation of the program of the New Popular Front would destroy the results of the policy we have followed in the last seven years, which has given France jobs, attractiveness and factories. Their project is excessive, ineffective and outdated. The legitimacy of his is weak and circumstantial should not be applied”.

Left-wing LFI leader Jean-Luc Mélenchon has expressed similar distaste for his opponents. At Macron’s Ensemble, he said yesterday: “We refuse to enter into negotiations with his party to make compromises, especially after we have fought against his failures for seven years.”

While a coalition between these two forces seems unlikely, some also believe that the New Popular Front, hastily formed before the election, may not even last a week.

In addition to the LFI, the NFP consists of several parties, including the more moderate Socialist Party, the green Ecologe party and the French Communist Party – all of which have their own agendas.

Could Mélenchon get the keys to the coffers?

Combined with this political conundrum, economic analysts are also wary of Mélenchon’s promises of a spending spree.

The LFI has said it wants to progressively increase public spending by 150 billion euros, a plan it claims will be funded by higher taxes on the wealthy.

The Montaigne Institute estimates that the New Popular Front’s campaign promises would require nearly 179 billion euros in additional funding per year.

Among other policies, the group wants to implement a 10% pay rise for civil servants, increase housing subsidies by 10%, hire more teachers and health care workers and cancel Macron’s pension reform.

These promises come at a time when France’s economic health is not in good shape.

France’s budget deficit reached 5.5% of economic output in 2023, well above the government’s target of 4.9%, and a result that was accompanied by a credit downgrade by S&P in March.

Despite the uncertain path ahead for French politics, some analysts have nevertheless pointed out that the country’s looming stalemate could reassure some investors.

If the left struggles to secure a majority, Mélenchon will not have easy access to state coffers. This means that his more radical policies may fall by the wayside.