Impact of France’s election on stock market

An overview of France’s parliamentary election

An early legislative election was held in France on 30 June 2024, with a second round to be held on 7 July, to choose all 577 members of the 17th National Assembly of the Fifth French Republic. France’s parliamentary election could impact stocks in the wider European region, according to Citi.

President Emmanuel Macron's decision to call for a snap parliamentary election aimed to bring clarity to France's political landscape. However, following the surprising results of the second round, the situation has become more uncertain than it has been in decades.

But after a week of political bargaining, in which more than 200 left-wing and centrist candidates withdrew from the second round in a bid to avoid splitting the vote, the NFP – a cluster of several parties from the extreme left to the more moderate – emerged with the most seats in the decisive second round. The left-wing New Popular Front (NFP) coalition's unexpected surge in support thwarted Marine Le Pen's far-right National Rally (RN) party. Despite this outcome, French politics is now characterized by increased disorder compared to the pre-election period.

Stares performance during France’s parliamentary election

Banker’s perspectives

“Our model suggests that the market is pricing in something between a benign outcome and a gridlock ... not completely, but we are a few percentage points away probably from fully pricing the gridlock,” Beata Manthey, the bank’s head of global equity strategy, told CNBC’s “Squawk Box Europe” on Friday. “However, the market is not priced in for far-right or far-left majority,” Manthey said.

French stocks

French stocks and the euro surged on Monday following indications from the first round of elections that the far-right will significantly undermine President Emmanuel Macron, although they are unlikely to secure a majority in parliament. After Macron announced the snap election on June 9, euro reached its highest level against the dollar in over two weeks.

Before the first round, investors were apprehensive that voters could opt for a parliament leaning towards either the far-right or far-left, promoting higher spending that could worsen France's already significant debt and budget deficit — the disparity between government spending and tax income. At the end of last year, France’s government debt amounted to 110.6% of gross domestic product. The budget deficit reached 5.5% of GDP, one of the highest among the 27 countries in the European Union.

French markets remain low

Many strategists suggest French markets are unlikely to return to previous highs, the prospect that extreme parties to the right or the left won’t gain control was enough to kickstart a rally. “Markets are quite content there’s no apparent absolute majority,” Claudia Panseri, chief investment officer for France at UBS Wealth Management. “The most extreme scenarios for the spread have been excluded.”

Investors hoped that there was now less chance that either the hard-Left or the hard-Right would have a free hand to roll out big-spending policies that could hurt France’s fiscal position, analysts said. Fiona Cincotta, an analyst at City Index owner StoneX, said: “The market is experiencing a relief rally that NR looks unlikely to achieve an absolute majority.”

Currently, as France faces a potential hung parliament, the market is grappling with political instability. With no party securing a majority of 289 seats, coalition formations are necessary to prevent legislative deadlock.

However, the prospect of such coalitions appears doubtful in practice, particularly due to the reluctance of Ensemble party centrists to align with the far-left. After the stock market declined following the sudden announcement of a legislative election last month, shares rebounded in the week leading up to the election. This recovery was driven by forecasts suggesting that the RN would not achieve a majority vote.

1. confused by the first round results
   The results from the first round of voting were too confusing to trigger a selloff. France's two-round voting system complicates predicting the final seat distribution after next Sunday's run-offs. Three major polling companies suggest the RN could secure anywhere from 230 to 295 seats. A majority requires 289 seats, and with significant potential for strategic voting in the second round, the RN faces slim odds of forming a government independently. Investors found reassurance as Marine Le Pen's National Rally did not secure a decisive victory in the first round of France's snap parliamentary elections. However, the initial optimism is beginning to wane.
2. confused by the new uncertainties
   French markets have been volatile since Macron's surprising move, following his Renaissance party's defeat to the far right in a European Union lawmaker vote earlier in June. The 46-year-old centrist has spearheaded pro-growth economic reforms in Europe's second-largest economy, sparking concerns among investors that these reforms could be reversed under a potentially divergent parliament.

France is now set for a prolonged period of instability as three opposing blocs with competing ideas and agendas try to form a coalition or find themselves stuck in a state of paralysis.

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