French stocks and the euro were boosted by the election results

London
CNN
—

French stocks and the euro rose on Monday after the results. first round Opinion polls in the elections indicate that the far right will inflict a heavy defeat on President Emmanuel Macron, but will not be able to win an absolute majority in Parliament.

France’s CAC 40, which represents 40 of Paris’s biggest listed companies, rose 2.7% at the open. The index closed up 1% but is still about 6% below its level before Macron called for early elections on June 9.

Bank stocks, the leaders in the economy, recovered some of the heavy losses they incurred in recent weeks. BNP Paribas shares closed up 3.6%, while Société Générale and Credit Agricole shares rose 3.1% and 2.8%, respectively.

Euro which landed After Macron’s surprise election win, the pound hit its strongest level against the dollar in more than two weeks on Monday.

Yields on French government bonds, or the returns investors demand in exchange for the risk of holding them, were largely unchanged after widening sharply relative to their ultra-safe German counterparts in recent days. On Friday, the risk premium on German government debt hit its highest since the euro zone crisis more than a decade ago.

While a Macron defeat would likely be bad news for France’s precarious finances — a hung parliament could mean gridlock — the worst-case scenarios for investors appear to have receded. Just two weeks ago, they were concerned that France might be headed for Financial crisis Similar to the UK market crash in 2022 caused by unfunded tax cuts proposed by former Prime Minister Liz Truss.

After an unusually high turnout on Sunday, Marine Le Pen’s far-right National Rally party came first in the first round, taking 33.15 percent of the vote, while the leftist New Popular Front coalition came in second with 27.99 percent. Macron’s coalition dropped to a dismal third with 20.76 percent, according to final results released by the French interior ministry on Monday.

“The outcome may be better than expected (for markets) but not as good as the situation that prevailed three weeks ago before the election,” Mohit Kumar, Jefferies’ chief economist for Europe, wrote in a note on Monday. “The immediate reaction was a sigh of relief.”

Going into the first round, investors feared that voters would elect a far-right or far-left parliament committed to spending more, further ballooning the country’s already high debt and budget deficit — the difference between what the government spends and what it receives in a year. Taxes.

At the end of last year, French government debt stood at 110.6% of GDP. Budget deficit reached 5.5% of GDP, one of the highest rates among the 27 countries of the European Union.

Sunday’s vote may have eased the risk of aggressive fiscal policy in Europe’s second-largest economy, but investors remain concerned that the new, divided parliament will not be able to address the country’s debt problem.

“We may still be looking at the next few years of political paralysis in France as the reform process stalls,” Kumar said, referring to Macron’s policies to boost economic growth.

Many other analysts also see a hung parliament as the most likely outcome, meaning no party would win a majority of seats.

This could lead to “stalemate,” according to Holger Schmieding, chief economist at Berenberg. “In that case, no new government would be able to accomplish much,” he wrote in a note on Monday.

It would be worse than gridlock if Le Pen’s National Rally movement joins parts of the left to cut taxes and undo some of Macron’s reforms, such as Raise the retirement age To 64 years for most workers.

The National Rally Party pledged to reduce the value-added tax on electricity, fuel and other energy products From 20% to 5.5% And comment it all For dozens of basic necessities. Meanwhile, the New Popular Front, a leftist Pledge To increase the minimum wage and freeze the prices of many basic goods.

The third scenario — dubbed “Marin Meloni” — would see Le Pen follow the lead of Italian Prime Minister Giorgia Meloni and focus on signature policies like a tough stance on immigration while toning down “more costly or disruptive fiscal promises,” with the aim of winning the 2027 presidential election, according to Schmieding.

He added: “The three main scenarios mentioned above involve a gradual deterioration in the outlook for France… but they do not indicate an immediate crisis similar to the Les Truss crisis.”

In the longer term, there may be a partial rollback of some of Macron’s reforms, leading to lower economic growth and higher inflation.

He added, “This matter, along with the possibility of downgrading the credit rating, would increase the cost of financing and exacerbate the financial problems facing France over time.”

Rating agency Standard & Poor’s reduced Fitch Ratings downgraded the French government’s credit rating in May, citing a “deterioration in its fiscal position,” although it still believes the country has sufficient capacity to repay its debts.

With the final round of voting set for July 7, the outcome of the French elections remains uncertain, as the door is still open for Le Pen’s National Rally party to win a majority.

“We suspect that the improvement we saw this morning in sentiment will continue as we head into the next round of voting,” Rabobank analysts wrote in a note.

Anna Copan contributed to this report. This story has been updated with additional information.