The euro reached a 10-day high as the first round of France’s shock snap election unfolded, with the far-right party leading the pack. However, the outcome remains uncertain, leaving investors on edge as they anticipate further volatility in the market. Marine Le Pen’s National Rally (RN) emerged victorious in the first round, albeit with a smaller share of the vote than initially expected. The final result will depend on how parties choose to form alliances for the second round in each of France’s 577 constituencies. This uncertainty sets the stage for days of political bargaining leading up to the runoff next Sunday.
Despite the political turmoil, the euro managed to gain 0.3% against the US dollar, reaching $1.0749 – its highest level since June 20. Analysts attribute this uptick to the absence of major surprises in the election results. Fiona Cincotta, senior markets analyst at City Index, stated, “Le Pen had a slightly smaller margin than some of the polls had pointed to, which may have helped the euro a little bit higher on the open.” The financial markets have been rattled by the prospect of significant spending increases promised by both the far-right and leftwing alliances, especially amidst France’s already high budget deficit that has drawn the attention of the EU for potential disciplinary actions.
Following the shock election announcement, France’s bond yields surged compared to Germany’s, reaching levels not seen since the euro zone debt crisis in 2012. Major French lenders witnessed substantial drops in their stock prices, leading to significant losses in the Paris CAC 40 stock index. As the European markets gear up for trade on Monday, analysts anticipate minimal recovery in France’s bond market. Peter Goves, head of developed market debt sovereign research at MFS Investment Management, noted, “We struggle to see a material and sustainable snap back.”
With the high uncertainty surrounding the final election results, markets are expected to remain volatile. Political alliances and candidate decisions leading up to the runoff will heavily influence market dynamics. The leftwing alliance has indicated their willingness to withdraw candidates who finish third on Sunday to block the RN from gaining power. Should credible alliances materialize to prevent the far-right party from taking control, French bonds could potentially see a recovery. The record-high voter turnout suggests a significant number of three-way run offs are likely, which could benefit the RN more than two-way contests.
As the election saga unfolds, markets are bracing for another week of high uncertainty and fear. The possibility of the RN securing an absolute majority in the upcoming election adds to market jitters. Carsten Brzeski, global head of macro at ING, expressed concerns, stating, “Markets are looking into another week of really high uncertainty.” The outcome of the election and subsequent political developments will continue to drive market movements and keep investors on edge.