French Elections: Far-Right Leads First Round

Marine Le Pen’s far-right National Rally (RN) party led the first round of French elections on Sunday, bringing it one step closer to power.

Marine Le Pen talking to her supporters after the results, emphasised that next Sunday’s vote will be key: “Democracy has spoken, and the French people have placed the National Rally and its allies in first place – and has practically erased the Macronist bloc. Nothing has been won – and the second round will be decisive.”

The bitter irony couldn’t have been lost on Emmanuel Macron. He called the snap vote, after the far right’s gains in June’s European election, with the aim to stop France’s far-right, but he unfortunately achieved the opposite.

Round 1 results of French elections

After an unpredictable high turnout, the RN bloc grabbed 35.15% of the vote, while left-wing New Popular Front (NFP) coalition came second with 27.99%. President Emmanuel Macron’s Ensemble alliance came in third with 20.76%, according to the final results announced by the Interior Ministry on Monday.

The RN could win the most seats in the National Assembly, but it could fall short of the 289 seats needed for an outright majority, suggesting France may be heading for a hung parliament which could weigh on the euro as political uncertainty increases.

EUR/USD

The possibility of a far-right majority forming a government has spooked markets in recent weeks. However, the initial reaction to the first round of voting in the French Parliamentary election was one of relief, with the EUR/USD opening higher on Monday.

Despite Marine Le Pen’s National Rally party coming in ahead with the biggest vote share, strategic alliances, and voting could still stop her from winning. The Socialist Party has already asked for strategic alliances ahead of the second round of voting next Sunday, to block

Le Pen’s far-right party from winning an absolute majority. Everything and anything can happen, with 577 French districts heading to the second round run off next Sunday.

Potential alliances after French elections

Obviously, a leftist alliance is not ideal for Le Pen.

A potential alliance between President Macron and former Socialist French President Francois Hollande could lead to a left-leaning unity government which will block Le Pen’s party from gaining a clear majority. As Politico put it on Monday (1 July), “Emmanuel Macron faces a bitterly painful choice: Throw everything he’s got at stopping the far right, or try to save what remains of his once-dominant movement before it dies.”

Market-friendly alliances

In a statement yesterday, Emmanuel Macron suggested that some of his candidates could drop out to allow left-wing parties to win, such as the leftist popular alliance. This will make the second round harder for Le Pen, as it will raise the chances of winning for the Left leaning Popular Alliance which has already received 28.5% of the vote.

Together with Macron’s Ensemble party which won 22.5% of the vote, the leftist alliance will be able to beat the National Rally. But will the left and centrists have a better chance to win the election next Sunday? Either way, for the markets, anything is better than an outright majority by Le Pen’s party.

The market’s concerns about a far-right government are multifold. For one, anti-immigration policies are one of the main concerns as they would increase the current budget deficit of 5.5%.

Such a government will add to fiscal pressure on France and will follow such policies as lowering the pension age. On the other hand, a hung parliament could make it difficult for Le Pen’s party to push any anti-democratic policies, an outcome which is favoured by markets.

Uncharted territory: All chaos will be let loose

If the second-round vote on 7 July delivers a parliamentary majority for the National Rally, France will enter uncharted territory. Le Pen’s party could usher France into a new period of uncertainty where politicians who sympathise with Vladimir Putin, want to destroy the European Union, and want to wage war on migration and resign from NATO will be the ones steering the wheel. Their victory would increase Le Pen’s chances of winning the French presidency in 2027.

French stocks affected by French elections

French stocks might have had a really bad month, but is it time to look for a recovery? The Cac 40 is the worst performing index in Europe to date and posted half a year loss of more than 3% when adjusted for currency difference. Since the election was called a month ago, bank stocks notably dropped and they were some of the worst performers in the index in France.

Out of all the stocks of the index, Credit Agricole and Société Generale declined 20 % each in June. Similarly, BNP Paribas S.A declined by 12% in the previous month. Markets are worried about the amount of French debt that domestic banks have been exposed to that a change in government, such as Le Pen’s, could increase their risk, if there was a big sell-off of French debt.

With negative news already priced into French stocks, things can only get better, especially if the polls suggest a hung parliament or further gains for the leftist alliance.

The next few days could see a binary outcome for French stocks: if support for National Rally weakens in the next five days, this may trigger a broad based rally for stocks, but if support for the far right strengthens, then stocks may go down again.

That’s why French stocks will be in the spotlight this week. In this regard, the current result was more or less foreseen, but the anti-Le Pen coalitions that could emerge to prevent her from coming to power are already being built at the moment.

If they begin to look credible, we could see French markets stabilise and the French German 10-year bond yield spread start to recover. Therefore, if concerns about a far right government start to gradually fade away, it will first be evident in the French-German yield spread.

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