French Markets, Euro Rally on Prospects of Anti Far-Right Alliance in France — Update

By Cristina Gallardo

French stock markets, government bonds and the euro rallied amid expectations of a French cross-party alliance to deny the far-right an overall majority in the second round of the French election.

France's CAC 40 blue-chip index in Paris was up 2.1% in early trading at 7633.85, with banks and construction companies among the biggest risers. Societe Generale was up more than 5%, topping the CAC 40 gainers, while Credit Agricole and BNP Paribas climbed more than 3%. Vinci and Bouygues rose about 4%.

The election results in France fueled gains in other European countries as well. The Stoxx Europe 600 index rose 0.6%, with Germany's DAX up 0.3% and Spain's Ibex 35 up 1.1%.

The euro strengthened 0.2% against the dollar to $1.08, and was trading broadly flat against the pound in early Monday trading.

French-German government bond yield spreads tightened, and the 10-year OAT-Bund yield spread traded 7.5 basis points narrower at 70 basis points on early Monday, according to Tradeweb data.

Marine Le Pen's National Rally party and its allies came up first in the first round of the French parliamentary election, with a third of the votes, according to Interior Ministry figures. The New Popular Front--a left coalition comprising socialists, greens and the far-left party France Unbowed--obtained about 29% of the vote, while French President Emmanuel Macron's pro-business party fell to third place with around 20%.

With an absolute majority in the second round, scheduled for July 7, the National Rally would be able to appoint Le Pen's protege Jordan Bardella as prime minister and have a say in top appointments to European roles.

But centrists and left-wing parties look set to withdraw third-placed candidates for the second round in a bid to stop the National Rally from winning in their constituencies. That could lead to a hung parliament, in which the far right, the left coalition or Macron's centrist party won't be able to muster a majority, and any new government wouldn't e able to get much done.

An alliance to block the National Rally could lead to Le Pen's party only winning in about 30 or 40 of the 300 contested seats in the second round, Axel Rudolph, a senior market analyst at trading platform IG Group, told Dow Jones Newswires.

"The market is relieved by that possibility," he said.

The French equity market could be boosted further Monday by trading in the U.S., which since the 1950s tends to perform the best on the first day of the third quarter, Rudolph said.

The CAC 40 blue-chip index is the weakest in Europe this year, but markets could recover if the alliances that could block the far right from gaining power start to look credible, XTB research director Kathleen Brooks said, but French stocks look set for a big test ahead of the election's second round.

"The next few days could be a binary outcome for French stocks: if support for the National Rally shows signs of breaking down in the next few days, this could spur a broad-based rally, but if support for the far right holds up, then stocks may stage another sell-off," Brooks said.

A hung parliament that is unable to pass budget cuts could further increase France's public debt ratio and impact the French government bond yield spreads, Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, said in a research note. Capital Economics' central scenario is that the 10-year OAT-Bund spreads will settle around 100 basis points, once any initial volatility around the election and its aftermath has eased.

Write to Cristina Gallardo at cristina.gallardo@wsj.com, Emese Bartha at emese.bartha@wsj.com and Ronnie Harui at ronnie.harui@wsj.com

(END) Dow Jones Newswires

July 01, 2024 04:24 ET (08:24 GMT)

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