Here's what to watch in the first round of France's parliamentary elections

By Steve Goldstein

The first round of France's parliamentary election is held Sunday, with the eurozone's second-largest economy likely headed to a legislative stalemate.

The first round will determine which candidates make it into the second round on July 7. In theory, candidates can get elected in just the first round if they get an absolute majority and more than 25% of the registered electorate's support, but that happened in just five out of 577 seats last time.

If that doesn't happen, then the top two candidates - and any other that received more than 12.5% of registered voters - move onto the second round. Analysts are expecting more three-candidate races than usual to emerge because voter turnout is expected to be stronger.

Exit polls will be available from 8 p.m. local time, or 2 p.m. U.S. Eastern.

Opinion polls show the far-right National Rally likely to command the most seats, but not a majority of 289. The far-left New Popular Front would take second, and President Emmanuel Macron's centrist Ensemble coalition would finish third.

The legislative stalemate likely to ensue comes after the European Union was instructed to begin what's called an excessive deficit procedure against France and six other countries.

That's put pressure on French bonds, particularly relative to German ones. On Friday, the yield gap between the 10-year bonds of Germany BX:TMBMKDE-10Y and France BX:TMBMKFR-10Y was 78 basis points.

"In a scenario where a French government with an absolute majority explicitly rejects the Stability and Growth Pact, we would expect 10y France vs Germany spreads to test a level of around 130 bps," said UBS economists led by Felix Huefner. "This is approximately where Italy traded going into the European elections. In contrast, we think spreads would settle substantially lower in the case of an outcome with a relative majority."

French stocks FR:PX1 have declined since Macron called a snap election on June 9, but most of those losses were in the first week, and equities in France have been in a holding pattern since.

Analysts at JPMorgan led by Nikolaos Panigirtzoglou say investors see the French elections as a local problem but not a European one. That conclusion is drawn from position patterns on key futures contracts that have largely remained the same.

The one exception is that investors have reversed the initial de-risking of CAC-40 futures.

"Cumulatively from June 7th to June 25th, our position indicator in CAC-40 futures is up significantly compared to a small decline for Eurostoxx 50 futures. In our mind, this reversal poses vulnerability for French equities going forward if the fiscal policies of the new French government prove more problematic than currently assumed by market," they said.

-Steve Goldstein

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06-29-24 0533ET

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