French Stocks Recover From Initial Fall After Leftist Alliance Win — Update

By Cristina Gallardo

French stocks rose while government bonds fell in early trading after an alliance led by the far-left emerged first in the country's parliamentary elections, pushing France toward political paralysis.

France's CAC 40 index rose 0.6% to 7722.91, after opening 0.42% lower in early trading Monday, following the left-wing New Popular Front victory in the second round of the elections Sunday, which fell short of an absolute majority.

Societe Generale shares traded 1.4% higher, while BNP Paribas shares rose 0.4% after both opened on a downward trajectory. Teleperformance was the worst performer on the CAC 40, down 3.2%.

The election results in France, the second biggest economy in the euro zone, triggered initial losses in some other European markets. The Stoxx Europe 600 index is up 0.4% and the FTSE 100 is 0.06% higher having both opened lower. Germany's DAX rose 0.5%.

The euro traded broadly flat against the dollar at $1.08 and at 0.85 against the pound in early trading.

The 10-year OAT-Bund yield spread traded four basis points lower at 68 basis points, according to Tradeweb.

The NPF--an alliance led by Jean-Luc Melenchon's France Unbowed that includes the mainstream Socialists, the Communists and the Greens--came first with 188 seats in the 577-seats National Assembly, according to the French interior ministry.

French President Emmanuel Macron's centrist Ensemble alliance came second with 161 seats, followed by Marine Le Pen's far-right National Rally and allies in third place with 142 MPs, according to the ministry.

No party succeeded in securing the 289 seats required to form a government, which means France faces the prospect of a hung parliament or a coalition.

Melenchon has insisted in implementing his entire program, which includes cutting retirement age from 64 to 60, and has refused any negotiation with Macron's centrists.

The identity of the prime minister remains unknown, but Socialist Party Leader Olivier Faure said Monday that the NPF will choose a candidate for the role from within the alliance this week.

"Trying to build a government that has any kind of stability looks a very high bar this morning," Deutsche Bank analysts wrote in a research note. "Political paralysis for the next 12 months seems the most likely outcome."

Starting from 2024, EU member states have to comply with the revised European fiscal rules requiring a credible fiscal plan to reduce debt-to-GDP ratios over a multi-annual horizon. In June, the European Commission proposed an Excessive Deficit Procedure for France--which had a budget deficit of 5.5% of GDP last year--as well as Italy and five other EU countries. Before the French election, Macron committed to a notable fiscal consolidation in 2025.

A hung parliament, however, could boost policy uncertainty in France and make budget cuts less likely, potentially reducing the pace of fiscal consolidation and acting as a catalyst for slower adjustment in other countries, including Italy, analysts say.

"If the far left do form a government, their policies, if enacted, would certainly aggravate France's fiscal position, and put the country on course to clash with Brussels over a breach of fiscal rules," said XTB's research director Kathleen Brooks.

Berenberg's chief economist Holger Schmieding said that in the long term, partial reform reversals and a less favorable reputation among global investors will likely reduce trend growth and raise inflation in France.

"Coupled with the potential credit rating downgrades, this would raise financing costs and exacerbate France's fiscal woes over time. We maintain our view that, based on fundamentals, French yields should not be lower than those of Spain," he said.

Write to Cristina Gallardo at cristina.gallardo@wsj.com

(END) Dow Jones Newswires

July 08, 2024 05:08 ET (09:08 GMT)

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