French election: first-round outcome

There were no major surprises in the first round of France’s snap parliamentary elections, despite the highest voter turnout in several decades.

Just as the polls were suggesting, Marine Le Pen’s Rassemblement National (RN) received a third of the votes, followed by the left Nouveau Front Populaire (NFP) bloc with almost 30% of the vote, and only then Macron’s Ensemble alliance with just over 20%. That means this Sunday’s second-round vote will be a three-way contest.

While Le Pen, Bardella et al were all smiles in the aftermath of the result, a majority is far from guaranteed this weekend. Both the left and centrists have signalled that they will prioritise preventing the far-right from making further gains, and so are likely to adjust their final candidate lists (due late Tuesday). For example, the left-wing parties – ranging from the far-left to more moderate Socialists – have stated they will remove any candidates that finished in third place, in turn boosting Macron’s party odds (three people qualified in more than half of France’s 577 constituencies).

The bottom line is that the ‘co-habitation’ scenario – in which France is governed by Macron and a (28-year old) RN Prime Minister – may not be on the cards. Instead, we could see a hung parliament, which would block any extreme policies from the RN.

Even if the latter were to win a majority, the impact on local markets would not necessarily be dramatic. Volatility may surge in the near term and French government spreads could remain elevated due to heightened fiscal concerns. Yet, France leaving the euro – the bigger risk which would impact global stock markets – is not on the table. Marine Le Pen has moderated her party’s stance over the past decade (it remains on the extreme end of the political spectrum, nonetheless).

This morning’s market reaction reflects our thoughts. French stocks have initially woken up to a 2% gain, the 10-year OAT spread with German government bonds – a measure of wider euro area risk – has narrowed slightly (Figure 1), and the euro has moved modestly higher against the dollar. A return to pre-election levels across these asset classes is unlikely until we know Sunday’s second round outcome. But it is unlikely to affect the things that matter more to stocks – the outlook of earnings and interest rates – and Europe’s growth backdrop remains constructive, with GDP turning a corner and real wages growing again.

Figure 1: 10-year France (OAT) - Germany (bund) government bond spread

Basis points

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