France election: update

Amid a hung parliament, should investors hang around?

While a hung parliament was expected, the second round of the French election still delivered a shock result: the far-right National Rally was pushed into third place in a result that triggers days if not weeks of negotiations between the parties to form a government.

With the most seats, France’s left-wing New Popular Front (NFP) alliance is in pole position. But the worst-case scenario for markets – an NFP absolute majority – has been averted. Its high-tax and high-spending agenda – which includes a wealth tax and freezing the price of basic food items and energy – was seen as a threat to financial stability.

Therefore, a hung parliament should be a near-term positive for markets because both the far right and leftist parties lack the seats to implement extreme policies.

Overall, market reaction has been muted, with investors in wait-and-see mode. The 10-year France-Germany spread widened slightly on Monday morning to 71bps, before narrowing to 65bps. The formation of a new government could take some time and there is no visibility on alliances. But the lull should be temporary.