As we expected, no political party obtained an absolute majority in the French General Elections held on July 7th. However, the left-coalition “New Popular Front” surprisingly finished in first place with 182 seats, followed by Ensemble (Macron’s party and allies) with 168 seats, a far better outcome than expected a few days ago.
Rassemblement National finished third with 143 seats, while Natixis CIB research and most polls expected a relative majority, reflecting the success of the “Republican front” strategy against the far-right.
Markets reacted very slightly, with an OAT Bund 10Y spread down by 2 bps to 64 bps, versus a peak close to 80 bps during the elections and 50 bps before the announcement of the snap election. It nevertheless seems unlikely to return to its pre-European elections levels, as there still remains a slight risk premium on French rates and assets. Spreads on most credit segments have returned to their pre-European election levels. The euro-dollar, which had risen from 1.07 to 1.09, has stabilized at 1.08, as the systemic risk of an anti-European assembly dismissed.
Longer-term trends will depend on forthcoming political events. In the coming days, we expect negotiations to form a government coalition from moderate-left to moderate-right to take place, supported by the strong dynamics of the Socialists and the Greens. Nevertheless, the bar seems high for a “Grand coalition” to arise, which would include the LFI’s participation, as the latter’s leader indicated that he wants to apply his program without concession.
The risk of political deadlock should therefore not be underestimated. In any case, the next budget must be submitted to parliament by 1st October, which will be the key compass to gauge the strength of the next government.
In a webinar, our economists analyzed the various possible scenarios for the next government to be able to implement its measures, particularly the reduction in the public deficit demanded by Europe and the rating agencies. They also provided their forecasts for the interest rate, credit, cross-asset, and foreign exchange markets. Gain their insights in the replays!
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