French stocks volatile after far-left surprise election victory

French markets were volatile on Monday morning after France’s far-left coalition party secured a surprise victory in parliamentary elections on Sunday evening.

After a modest decline in early trading, shares in the CAC 40 rebounded strongly, only to fall sharply just before 11:00 CET. Prices have been fluctuating on a downward trajectory ever since.

And this despite surprisingly little movement on the French bond market, where the 10-year interest rate is around 3.2%.

Latest polls show that the left-wing alliance New Popular Front (NFP) won 182 of the 577 seats in the French National Assembly after Sunday’s vote.

Incumbent President Macron’s centrist alliance is expected to win 168 seats, while the far-right RN is expected to win just 143 seats, defying earlier predictions that the party could win an outright majority.

“It seems like the anti-far-right parties have really got a lot of support,” said Simon Harvey, head of FX analysis at Monex Europe, as quoted by Reuters.

“But fundamentally, from a market perspective, there is no difference in terms of the outcome. There will really be a vacuum in terms of France’s legislative capacity.”

French politicians face a stalemate

After markets fell last month following the announcement of early parliamentary elections, shares rose slightly in the week leading up to the election, buoyed by predictions that the RN would fall short of an outright majority.

While France is dealing with a non-party parliament, the market is struggling with political uncertainty.

As none of the parties managed to secure a majority of 289 votes, groups will have to form coalitions to avoid legislative deadlock.

In practice, this possibility seems unlikely, as politicians from the centrist Ensemble party would not feel comfortable working with the far left.

Finance Minister and Macron ally Bruno Le Maire sharply criticized the NFP’s victory on Monday morning.

“The most immediate risk is a financial crisis and economic decline in France,” he warned.

“Implementing the program of the New Popular Front would destroy the results of the policies we have pursued over the past seven years, which have given France jobs, attractiveness and factories. Their project is excessive, ineffective and outdated. Its legitimacy is weak and circumstantial. It must not be implemented.”

The left-wing leader of LFI Jean-Luc Mélenchon has expressed similar distaste for his opponents. Speaking about Macron’s Ensemble yesterday, he said: “We refuse to enter into negotiations with his party to find compromises, especially after seven years of fighting against his failures.”

While a coalition between these two forces therefore seems unlikely, some also believe that the New Popular Front, which was hastily formed before the elections, may not even last a week.

In addition to the LFI, the NFP consists of several parties, including the more moderate Socialist Party, the green Ecological Party and the French Communist Party. These parties all have their own agenda.

Could Mélenchon get hold of the keys to the treasury?

In addition to this political dilemma, economic analysts are also aware of Mélenchon’s promises of a huge spending spree.

The LFI has said it wants to gradually increase government spending by €150 billion, claiming that this plan will be financed by higher taxes on the rich.

The Institut Montaigne estimates that the New Popular Front’s campaign promises will require nearly €179 billion in additional funding each year.

The group wants to implement, among other things, a 10% pay rise for civil servants, increase housing subsidies by 10%, hire more teachers and healthcare workers and withdraw Macron’s pension reform.

These commitments come at a time when the French economy is not performing optimally.

France’s budget deficit in 2023 was set at 5.5% of economic output, well above the government’s target of 4.9%. The result was accompanied by a credit downgrade by S&P in March.

Despite the uncertain future of French politics, some analysts have pointed out that the looming impasse in the country may actually reassure some investors.

If the left struggles to secure a majority, Mélenchon will not have easy access to state coffers, meaning his more radical policies could fade into the background.