Traders predicted that Marine Le Pen’s National Rally would fall short of a majority in the French parliamentary elections, leading to a rise in the euro and a positive outlook for stocks.
The euro increased by 0.3% against the pound, reaching nearly 85p, its highest level since Emmanuel Macron announced the snap vote on June 10.
French bond futures also edged higher, even as German and other global counterparts experienced sell-offs.
Investors were worried that a strong showing for the National Rally could lead to increased government spending in France, which is already dealing with debts amounting to 112% of its GDP.
Kathleen Brooks, research director at XTB, commented: “A hung parliament could hinder legislative progress in France, which is precisely what the markets would prefer.”
The National Rally was projected to win around 34% of the vote, with the Left-wing New Popular Front securing about 29%, and Macron’s Together coalition coming third with 20.5-23%, according to various polls.
Vincent Juvyns, global market strategist at JPMorgan Asset Management, stated: “The fiscal policies of both camps are disruptive for the French economy and the outlook for French debt.”
Stocks experience a ‘relief rally’ as Frexit concerns diminish
French bonds and stocks have rallied as the likelihood of France leaving the EU, known as Frexit, has decreased following the first round of the country’s parliamentary elections, according to economists.
Mohit Kumar, chief Europe economist at Jefferies, said:
“The result is probably better than feared, but not as favourable as the situation three weeks ago before the elections.
Last week, we argued that a minority far-right government would likely be the sweet spot for the markets and present a buying opportunity.
We could still face years of political paralysis in France, with reforms stalling. However, any fears of Frexit or a euro area breakup are unfounded.
With the result still uncertain for the second round, we are not in a rush to invest in France and French assets.
Nonetheless, the event risk is likely diminished with an even lower probability of a Frexit scenario (which was never part of our scenario bucket, though market fears were understandable).
He added that the immediate reaction “is one of relief” because the result means “neither the far right nor the far left would have a free mandate to implement extreme policies.”
