After the shocks which followed the announcement of the dissolution of the National Assembly in the wake of the European elections of June 9, the results of the first round of the French legislative elections were greeted with relief by the financial markets on Monday 1is July.
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At the start of the session on the Paris Stock Exchange, the CAC 40 index gained 2.7%, erasing part of its heavy losses from June, a decline of 6.4% which marks the worst monthly performance of the French stock market for two years and has pushed the performance of French stocks into the red since 1is January.
On the foreign exchange market, the euro appreciated at the same time by 0.5% against the dollar to 1.0768 and on the government bond market, which is very sensitive to political uncertainties, the gap between the yield on French and German ten-year bonds fell to 73 basis points.
This gap or “spread”, a barometer of investors’ distrust of France’s signature on the debt market, rose to 86 points on Friday, its highest level since 2012, whereas it was less than 50 points before the announcement of the dissolution of the National Assembly on June 9.
An “Italian” scenario
The relaxation of this Monday morning has several causes. Some investors consider that the results of the first round of legislative elections make it possible to rule out both the hypothesis of a government coming from the New Popular Front and that of a large victory for the National Rally in the event that the withdrawals of the second turn would be unfavorable to the extreme right.
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“The most likely scenario is that of a Parliament without an absolute majority, which reduces extreme risks but leaves France in a complicated political situation.”says Xavier Chapard, strategist at LBP AM, in a note.
But above all, the markets believe in an “Italian” scenario, in reference to the government of Giorgia Meloni formed in October 2022, dominated by the extreme right, but anxious to preserve its budgetary credibility. Or, as one banker sums it up, “economically domesticated”.
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However, the rebound that began on Monday could be fragile. Because for many analysts, whatever the results of the second round and their institutional consequences, it is unlikely that the markets, starting with the bond market, will quickly return to the levels at which they were evolving before the dissolution, due to lack of certainty on the composition of the future government as well as its first decisions.
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