(Bloomberg) — French markets rallied and the euro gained on bets National Rally Marine Le Pen is poised to win the first round of French legislative elections by a smaller margin than some polls indicated, making it less likely the far-right will secure an absolute majority.
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CAC 40 stock futures jumped nearly 3% and the euro rose 0.6% to $1.0772, its strongest level since mid-June. French 10-year bonds rose, narrowing the spread on German notes to 73 basis points, the lowest in two weeks. A measure of European credit risk fell to its lowest level since June 13.
Early projections show Le Pen’s far-right party ahead of President Emmanuel Macron’s centrist alliance and the left-wing New Popular Front – but with potentially less than needed to secure an absolute majority after the second round of polls on July 7. This would slow down the legislative process and limit the National Rally’s ability to implement these policies.
Investors have worried that a strong showing for Le Pen’s National Rally will increase the likelihood of expansionary fiscal policy, bringing the bloated fiscal account into focus and further muddying the outlook for the common currency.
“We now have a week of horse trading ahead,” said Joachim Klement, head of strategy, economics and ESG at Panmure Liberum. He expects the euro to strengthen during the week as an alliance is formed to reduce the gains of Le Pen’s party.
What Bloomberg strategists are saying…
If the left alliance is “the aim to prevent Le Pen’s group from getting a majority in the important second round, this has many implications for the Franco-German spread and even the euro. If the result is that we will get a more centrist government, it will be positive for currency and spread a narrower spread.
– Ven Ram, cross-asset strategist for MLIV
The National Rally is expected to get 34% of the vote, according to analysis from five polling companies late on Sunday. The latest Bloomberg poll on Friday put it at 36.2%.
The left-wing New Popular Front coalition is set to get around 29% and Macron’s centrist alliance between 21% and 22%, forecast on Sunday.
“The fiscal policies of both camps are disrupting the French economy and French debt prospects,” said Vincent Juvyns, global market strategist at JPMorgan Asset Management, referring to the National Rally party and the New Popular Front coalition. “For me it’s still a wait and see.”
Other opponents of Macron and Le Pen have been strategizing to keep the far-right party out of power, with signs of progress that could bolster their case for a general rally.
If the alliance formed to block Le Pen from absolute power begins to look credible, the French market will recover, according to Kathleen Brooks, director of research at XTB.
“A hung parliament could make it difficult to do anything in France in the current parliament, which is what the market wants,” he said.
Still, strategists warn there is a possibility of volatility ahead, because the electoral calculus becomes complicated in the runoff when parties can strategically retain candidates in certain constituencies to give a boost to centrist hopefuls.
Volatility Is the Only Certainty for Traders Parsing French Results
Macron’s decision to vote in a snap vote in early June has sent markets reeling.
His party – which supports massive spending cuts to control France’s budget deficit – suffered a crushing defeat in European parliamentary elections. The National Rally, meanwhile, has touted several expensive budget measures including cutting energy and fuel sales taxes.
Over the past two weeks, the extra yield investors demanded to hold French 10-year bonds over safer German debt rocketed to more than 80 basis points, levels last seen during the eurozone debt crisis. The euro fell to its lowest level since early May.
Fiscal Pressure
It is hard to see a “material and sustainable snapback,” in French yields, said Peter Goves, head of developed debt market research at MFS Investment Management.
“Uncertainty is high, France’s fundamentals have not changed and the final result is still unknown and unknown in many complex three-way contests,” he said.
At a projection of 5.3% of output this year, France’s budget deficit has exceeded the 3% of economic output allowed under EU rules. The International Monetary Fund predicts that without further measures, debt will rise to 112% of economic output in 2024, and rise by around 1.5 percentage points per year over the medium term.
–With the help of Allegra Catelli, Julien Ponthus and Farah Elbahrawy.
(Updates market movements.)
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