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Banking investors have justified reasons to fear an outsized role for Marine Le Pen’s far-right Rassemblement National party in France’s next government. They put those concerns to rest on Monday. Although RN came out on top in the first round with 33.2 percent of the vote and ranked first in about 296 electoral districts, markets responded by pushing stocks higher, led by Société Générale and Crédit Agricole.
The relief rally was driven by investors betting that the chances of RN winning an outright majority are slimmer and that a hung parliament may be more likely. They should still proceed with caution.
France is already under the scrutiny of the European Commission, along with other countries, including Italy, for its large budget deficit. An RN majority would likely increase the deficit, with short-term promises to increase public spending. That could mean tighter financial conditions for French companies at a time when interest rates are supposed to be falling. In the longer term, Le Pen’s party plans to undo deeply unpopular reforms to public pensions implemented by President Emmanuel Macron. Even without a parliamentary majority, such demands may continue to put pressure on government bond prices.
How optimistic Monday’s rally appears will become clearer as efforts are made to present a “union”Republican Front”to counter RN proceed. The turnout and degree of fragmentation in the first round increase uncertainty. With a first-round turnout of 66 percent, the highest since the 1990s, there is an unusually large number of third-placed candidates making it to the second round.
Currently, up to 300 of the 504 seats could be contested in a run-off between three candidates. RN needs to win around 250 of them to obtain an absolute majority.
The leftists in third place have mostly agreed to abandon the next round to consolidate the anti-RN vote. Macron’s alliance has given a less explicit guarantee that it will drop third-place candidates when it believes it can do so.
The strength of republican front will dictate the outcome of the second round. But assumptions that centrists will shift to the left if presented with only two candidates “may be exaggerated,” warns Mediobanca’s Andrea Filtri, reducing the predictability of the second round. On the other hand, assuming that left-wing voters will converge their vote towards the centre makes some sense.
Expectations of a hung parliament might then be overly optimistic. That could leave the rally in prices in French markets with no choice but to go down.