French election results boost stocks and the euro

On June 24, 2024, French stocks and the euro rallied following the first round of elections, with markets showing signs of relief after preliminary results suggested that President Emmanuel Macron’s party will suffer a significant defeat but fall short of gaining a majority in parliament. The CAC 40 index, which represents 40 of the largest companies listed in Paris, increased by 2.7% at the open and ended 1% higher on the day.

Investors had been worried that the elections could result in a far-right or far-left parliament, leading to excessive spending and further increases in France’s already high debt and budget deficit. The euro also strengthened against the dollar, and the risk premium on French government bonds relative to German government debt declined, though it remained higher compared to levels before the elections.

Bank stocks, considered indicators of the economy’s health, posted gains, with shares in BNP Paribas, Societe Generale, and Credit Agricole all closing higher by 3.6%, 3.1%, and 2.8%, respectively. While the election result is better than some investors had feared, concerns persist over the potential for political gridlock, stalling reforms, and fiscal policies that could exacerbate France’s debt problem.

Some analysts believe that a hung parliament, where no single party holds a majority, is the most likely outcome. Such gridlock could lead to limited government action, while a potential alliance between the far-right National Rally and parts of the left could result in spending increases and policy reversals, such as reducing taxes and raising the minimum wage.

Another scenario, called “Marine Meloni,” refers to the possibility of National Rally leader Marine Le Pen emulating Italy’s Prime Minister Giorgia Meloni, pursuing signature policies like a hardline stance on immigration while downplaying more costly or disruptive fiscal promises. In the long term, a partial reversal of Emmanuel Macron’s reforms could reduce economic growth and raise inflation, potentially leading to credit rating downgrades and increased financing costs.

The second round of voting is scheduled for July 7, and the final outcome remains uncertain. Rabobank analysts cautioned that the improved sentiment in markets may not be sustained as investors await the results of the second round of voting.

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