French Election Result: Partial Relief but Political Uncertainty Lies Ahead

French Election Result: Partial Relief but Political Uncertainty Lies Ahead

The most widely anticipated political event of the last few years, the snap French National Assembly election, has concluded. 

Contrary to first round results and fears of far-right National Rally securing a majority, yesterday, in what was the highest turnout since 1981, the French people voted and in doing so distributed legislative power between three differing political blocs.

The Results 

Leftist coalition, the New Popular Front, won 182 seats, making it the largest group in parliament but short of the 289 required for an absolute majority. Macron’s centrist Ensemble alliance won 163 seats and Marine Le Pen’s far right National Rally and its allies won 143 seats.

Yesterday’s result may have demonstrated the French people’s desire to keep the far-right from gaining power – even at the expense of a hung parliament – but investors remain apprehensive as the policy outlook remains uncertain. 

President Macron now faces the challenging task of trying to appoint a prime minister from the left-wing coalition, form a government, and govern, as part of what is called a cohabitation. This will not be an easy task as the three political blocs have significantly diverging views on policy direction, including France’s relationship with the EU, the economy, and the country’s already fragile public finances. 

Immediate Market Impact 

The opening bell witnessed an immediate sell-off in the euro versus several major currencies; the EUR/USD dropped to a low of $1.0797, though has since reclaimed lost ground and trades marginally positive at the time of writing. The EUR/GBP also spiked to a low of £0.8429 and similarly caught a bid shortly after the open. However, the cross remains underwater as we head into US hours today.

In the equities space, France’s CAC 40 slipped -0.4% at the open, reaching a low of 7,628. However, the major equity index has since recovered and is trading unchanged on the session.

As for bonds, the 10-year government bond yield immediately jumped to a high of 3.23% and subsequently reached highs of 3.25% before rotating south and refreshing the July lows at 3.19% as of writing. The reaction in the OAT/Bund spread was calm at the open after briefly spiking to a low of around 0.65%, a three-week trough. Despite a swift recovery to just north of Friday’s level to a high of around 0.72%, we are now trading back around the opening lows.

What Next? 

Although markets would not have been so welcoming of a far-right or left majority, the current situation is not ideal either. The far-right remains a threat, and political uncertainty in Europe’s third largest economy is not going away anytime soon. A lot will be played out over the next few weeks as Macron tries to form a government and set a policy direction which will not upset the sovereign’s creditworthiness, the public finances, French stocks, and the Euro.