(Bloomberg) — The lack of a clear winner in the French election is being viewed with some relief by investors, who speculated that there is unlikely to be any major policy change while the government is in gridlock.
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French shares advanced on Monday alongside a broad advance in the European market, while bonds and the euro saw little movement. While benchmark bond spreads are still wider than before the election, a reflection of continued concern about the country’s debt burden, they have tightened recently as it looks unlikely that either the far right or the far left will be able to implement their big spending plans. .
The CAC 40 index gained 0.4%, recovering from an early decline. French bonds were little changed, with the 10-year yield at 3.2%. The euro remained steady after a seven-day advance, trading near 1.084 against the dollar.
“Radical reforms are unlikely to happen,” said Alexandre Hezez, chief investment officer at Group Richelieu. “Because there will be no structural reform even for spending, the wide spread of French debt will be preserved. But for other asset classes, it’s the scenario that causes less change.”
Read: Surprise win for left in French vote leaves investors on edge
With Sunday’s final round of voting signaling that the nation is headed for a long period of political strife, investors are scrambling to make sense of the likely outcomes. While a left-wing alliance will have the largest presence in the lower house, it does not have the numbers needed for overall control. President Emmanuel Macron’s group was second with Marine Le Pen’s National Rally dropping to third.
Money managers have spent the past week worrying about a government dominated by Le Pen, but the left’s success is still a concern for investors because it poses a fresh dose of uncertainty in the eurozone’s second-largest economy. .
However, the leftist alliance lacks an absolute majority – limiting what it can do – and some strategists suggested a hung parliament would be a positive outcome for investors.
The gap between French and German 10-year yields, a measure of credit risk, stands at about 65 basis points, below levels seen at the height of the market slump last month.
“If there is no government capable of taking action, it might not be so bad, as the reforms would not be reversed and no tax relief would be given,” said Edgar Walk, chief economist at Metzler.
The New Popular Front, which includes the Socialists and the far-left France Unbowed, won 178 seats in the National Assembly, according to data compiled by the Interior Ministry. Marine Le Pen’s National Rally, which pollsters last week saw as the winner of the election, came third with 143, while President Emmanuel Macron’s centrist alliance scored 156.
French markets plunged into a tailspin in June, wiping billions of euros out of stocks and bonds after Macron’s early poll fueled concerns that the far right would take power. But over the past week, traders pared some of those losses as opinion polls showed the National Rally would fall short of an outright majority. France’s CAC 40 index last week erased about half of the losses it suffered as a result of Macron’s announcement.
What our strategists are saying…
“The contours of the future government are not clear at all. That’s an outcome the country’s bonds won’t like — a prospect that will put pressure on its yield spreads. The main question for markets will be who the prime minister will be, how well they can work with the far left to pass legislation and most importantly what this means for France’s fiscal probity.
— Ven Ram, cross-asset strategist
An absolute majority for the left was identified by investors as the scenario they were most worried about in the days before the first round of votes. But that opportunity was rejected after Le Pen’s National Rally won the first round convincingly. Among its promises, the left-wing coalition wants to reverse seven years of pro-business reform and raise the minimum wage.
The Institut Montaigne estimates that the New Popular Front’s campaign pledges would require nearly 179 billion euros ($194 billion) in additional funding annually.
France is already facing a budget deficit that, at 5.5%, far exceeds the 3% of economic output allowed under European Union rules. The International Monetary Fund predicts that – without further measures – the debt will rise to 112% of economic output in 2024 and will increase by about 1.5 percentage points per year in the medium term.
S&P Global Ratings downgraded France in late May, highlighting the French government’s missed targets on plans to rein in the budget deficit after heavy spending during the Covid pandemic and energy crisis.
Vincent Juvyns, global market strategist at JP Morgan Asset Management, said tensions were likely with Macron-led reforms now in doubt, potentially hurting the value of French bonds against their peers.
“Markets may demand a higher spread as long as the new government has not clarified its fiscal position,” he said. “The European Commission and rating agencies expect 20 to 30 billion cuts, but the government will actually have to deal with a party that wants to increase spending by 120 billion.
–With assistance from Vassilis Karamanis, Verena Sepp and Greg Ritchie.
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