French shares are fluctuating after the surprise election success of the far left

French markets were volatile on Monday morning after France’s far-left coalition party swept to a surprise victory in Sunday evening’s parliamentary election.

After falling slightly in early trading, shares in the CAC 40 rebounded strongly to fall sharply just before 11:00 CET. Prices have been on a downward trajectory ever since.

And this despite surprisingly little movement on the French bond market, where the 10-year yield hovers around 3.2%.

The latest poll projections suggest the leftist New Popular Front (NFP) alliance won 182 of the 577 seats in France’s National Assembly after Sunday’s vote.

Incumbent Macron’s medieval alliance is set to take 168 seats, while the far-right RN is predicted to secure just 143 seats. This contradicts earlier predictions that the party could win an absolute majority.

“It looks like the far-right parties have really gained a lot of support,” Simon Harvey, head of FX analysis at Monex Europe, was quoted as saying by Reuters.

“But fundamentally, from a market perspective, there is no difference in terms of the outcome. There will really be a vacuum in terms of France’s legislative capacity.”

A stalemate awaits French politicians

After markets fell last month following the announcement of early legislative elections, stocks saw some gains in the week before the election, boosted by predictions that the RN would not secure an absolute majority.

Now, as France stares ahead at a hung parliament, the market struggles with political uncertainty.

With neither party able to secure a majority of 289, the groups will have to form coalitions to avoid legislative gridlock.

In practice, this possibility seems unlikely, as politicians from the centrist Ensemble party will hardly be comfortable with a connection with the extreme left.

Writing on X on Monday morning, Finance Minister and Macron ally Bruno Le Maire gloated over the NFP victory.

“The most immediate risk is the financial crisis and the economic decline of France,” he warned.

“The implementation of the program of the New Popular Front would destroy the results of the policy that we have carried out for the last seven years, which has given France jobs, attraction and factories. Their project is excessive, ineffective and outdated. Its legitimacy is weak and indirect. It must not be implemented.”

Left-wing LFI leader Jean-Luc Mélenchon expressed similar distaste for his opponents. At Macron’s Ensemble yesterday, he said: “We refuse to enter into negotiations with his party on compromises, especially after we have fought against his failures for seven years.”

While a coalition between the two forces seems unlikely, some also believe that the New People’s Front, hastily formed before the election, may not even last a week.

In addition to the LFI, the NFP consists of several parties including the more moderate Socialist Party, the Green Ecological Party and the French Communist Party – all of which have their own agendas.

Could Mélenchon get the keys to the treasury?

Combined with this political conundrum, economic analysts are also aware of Mélenchon’s spending promises.

The LFI has said it wants to gradually increase public spending by 150 billion euros, a plan it says will be funded by higher taxes on the wealthy.

The Montaigne Institute estimates that the election promises of the New Popular Front would require almost 179 billion euros in additional funding annually.

Among other policies, the group wants to introduce a 10% pay rise for civil servants, increase housing subsidies by 10%, hire more teachers and health workers and scrap Macron’s pension reform.

The pledges come at a time when France’s economic health is not in tip-top shape.

France’s budget deficit reached 5.5% of economic output in 2023, well above the government’s target of 4.9%, a result that was accompanied by a credit downgrade from S&P in March.

Despite the uncertain path of French politics ahead, some analysts pointed out that the country’s looming stalemate could actually reassure some investors.

If the left struggles to win a majority, Mélenchon will not have easy access to the state coffers. That means his more radical politics could fall by the wayside.