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French markets erased initial losses as investors speculated that the lack of a clear majority in the election means the next government will have to compromise, which will keep the most extreme policies off the table.\u00a0<\/p>\n
The CAC 40 Index added 0.2% after falling as much as 0.6% in early trading. French bonds were little changed, with the 10-year yield at 3.2%, and the euro steadied.\u00a0<\/p>\n
\u201cFor markets this is a double-edged sword,\u201d RBC analysts including Peter Schaffrik wrote. \u201cThe left wing alliance is not seen as business friendly and should command less faith in prudent budget management. However, the lack of a clear majority in the Assembly should blunt any spending plans for the time being and act as a cushion for spread widening.\u201d<\/p>\n
While money managers have spent the last week or so fretting over a Le Pen-dominated government, the left\u2019s success is still a concern for investors because it amounts to a fresh dose of uncertainty in the euro-area\u2019s second-largest economy and foreshadows more political wrangling ahead.\u00a0<\/p>\n
Still, the left alliance lacks an absolute majority \u2014 limiting how much it can do \u2014 and some strategists suggested a hung parliament would be a positive outcome for investors.<\/p>\n
The gap between 10-year French and German yields, a measure of credit risk, sits at around 70 basis points, below levels seen at the height of the market rout last month.<\/p>\n
\u201cFrench politics confounds yet again,\u201d said Geoffrey Yu, senior strategist at Bank of New York Mellon. \u201cBased on the results, risks of expansionary fiscal policy remain, and perhaps on the margins have picked up.\u201d<\/p>\n
The New Popular Front \u2014 which includes the Socialists and far-left France Unbowed \u2014 won 178 seats in the National Assembly, according to data compiled by the Interior Ministry. Marine Le Pen\u2019s National Rally, which pollsters last week had seen winning the election, came third with 143, while President Emmanuel Macron\u2019s centrist alliance notched up 156.<\/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 outcome is very different: Macron\u2019s centrist party \u2014 favored by investors \u2014 came in second place, despite a poor showing in the first round of voting. That could leave the president in a position to cobble together a centrist coalition.<\/p>\n
\u201cAlready the French far-left leader is saying he will implement his entire program and that he is unwilling to to enter any deals with Macron. That tone of defiance will hardly sit well with French bond investors.\u201d<\/p>\n
\u2014 Ven Ram, cross-asset strategist<\/p>\n