\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/07\/GettyImages-478694102-e1720389681870.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
The euro fell after initial projections in France\u2019s legislative elections pointed to a shock victory for the leftist alliance, whose campaign for a sharp increase in government spending risks unsettling investors.<\/p>\n
The common currency slipped 0.3% to around $1.0807 at the start of the session in Asia as traders began to digest an outcome they\u2019d largely written off just days ago, and has the potential to reignite a tumultuous few weeks for markets.\u00a0<\/p>\n
Initial projections show the New Popular<\/a> Front, which includes the Socialists and far-left France Unbowed, is\u00a0poised<\/a>\u00a0to get between 170 and 215 seats in the National Assembly. Marine Le Pen\u2019s far-right National Rally \u2014 which had been widely expected to win the most seats \u2014 is seen coming in third, after President Emmanuel Macron\u2019s centrist alliance.<\/p>\n While money managers have spent the last week or so\u00a0fretting<\/a>\u00a0over a Le Pen-dominated government, the left\u2019s success will likely still concern markets, given it amounts to a fresh dose of uncertainty in the euro-area\u2019s second-largest economy and because the cohort is committed to a broad easing of fiscal policy.\u00a0<\/p>\n That would exacerbate fears over France\u2019s already-bloated balance sheet and put the nation on a collision course with the European Union, which is already taking action to curb the budget deficit.<\/p>\n \u201cFrench politics confounds yet again,\u201d said Geoffrey Yu, senior strategist at Bank of New York Mellon<\/a>. \u201cBased on the results, risks of expansionary fiscal policy remain, and perhaps on the margins have picked up.\u201d<\/p>\n While the left alliance is unlikely to win an absolute majority \u2014 potentially limiting how much it can do \u2014 the result could roil French assets in the coming days.<\/p>\n French markets plunged into a tailspin in June, wiping out billions of euros from stocks and bonds as Macron\u2019s snap poll prompted concern that the far-right would take power. But over the past week, traders pared a chunk of those losses as opinion polls indicated that the National Rally would fall short of an outright majority. France\u2019s CAC 40 Index last week erased about half of the losses it endured in the aftermath of Macron\u2019s announcement.\u00a0<\/p>\n The picture painted by initial projections Sunday night is very different: Macron\u2019s centrist party \u2014 favored by investors \u2014 is on track for second place, despite a poor showing in the first round of voting. The outcome could leave the president in a position to cobble together a centrist coalition.<\/p>\n Still, the inevitable political wrangling, and anxiety about the influence of the left within a hung parliament, could push up the yield on the nation\u2019s 10-year debt \u2014 known as OATs \u2014 pushing the spread over safer German bunds wider once again. That spread had eased to close at 66 basis points on Friday, after rocketing to more than 80 basis points last month \u2014 levels last seen during the euro-area\u2019s sovereign debt crisis.<\/p>\n The \u201cshocking result\u201d could easily send the spread back above 80 basis points, according to James Rossiter, head of global macro strategy at TD Securities. \u201cRates markets went into the elections with the OAT vs bund spread pricing in a scenario for a hung parliament \u2014 but a hung parliament led by RN not NFP,\u201d he wrote in a note.<\/p>\n French bond futures start trading again at 2:10 a.m. in Paris, followed by cash bonds at 8 a.m. and stocks at 9 a.m.<\/p>\n An absolute majority for the left was identified by investors as the\u00a0scenario<\/a>\u00a0they were most concerned about in the days ahead of the first round of votes. But that possibility was discounted after Le Pen\u2019s National Rally convincingly won the first round. Among its pledges, the left coalition wants to reverse seven years of pro-business reform and hike the minimum wage.\u00a0<\/p>\n To implement its policies, the leftist New Popular Front would\u00a0require<\/a>\u00a0nearly \u20ac95 billion ($102 billion) in extra funds per year, six times the spending planned by Macron and his allies and almost double that proposed by the National Rally, think tank Institut Montaigne said before the vote.<\/p>\n France is already grappling with a budget deficit that at 5.5% far exceeds the 3% of economic output allowed under European Union rules. The International Monetary Fund predicts that \u2014 without further measures \u2014 debt would rise to 112% of economic output in 2024, and increase by about 1.5 percentage points a year over the medium-term.<\/p>\n S&P Global Ratings downgraded France in late May, highlighting the French government\u2019s missed goals in plans to restrain the budget deficit after huge spending during the Covid pandemic and energy crisis.<\/p>\n Vincent Juvyns, global market strategist at J.P. Morgan Asset Management, said tensions were likely with reforms spearheaded by Macron now in doubt, potentially hurting the value of French bonds versus their peers.<\/p>\n \u201cMarkets may demand a higher spread as long as the new government hasn\u2019t clarified its fiscal position,\u201d he said. \u201cThe European Commission and rating agencies are expecting 20 to 30 billions of cuts but the government will actually have to deal with a party which want to increase spending by 120 billion.\u201d<\/p>\n<\/div>\nSubscribe to the CEO Daily newsletter to get global CEO perspectives on the biggest stories in business. Sign up for free<\/a>.<\/div>\n