Key points:

  • The CAC40 index initially declined, but then recovered its losses and closed with an increase of 0.4%.
  • Share prices of major banks such as Societe Generale and BNP Paribas also rose after initial declines.
  • The euro stabilized after initially depreciating against the dollar and pound sterling.

After an initial decline, French stocks and bonds rose in early trading on Monday. Investors were gradually analyzing the election results, which led to uncertainty in parliament and the prospect of coalition negotiations to form a government involving tax compromises.

The unexpected success of the left in Sunday’s elections deprived Marine Le Pen of the opportunity to form a far-right parliamentary majority in the National Assembly, but neither political group won enough seats to govern the country independently.

French shares fluctuate

The instability at the opening of trading in French assets reflected conflicting investor sentiment. On the one hand, they were relieved that the far right had not won, but on the other hand, they were worried about the prospect of a strengthening of the left, as well as uncertainty about the future of the coalition government.

The CAC40 index, a measure of French blue-chip shares, initially fell but then recovered losses to close 0.4% higher. However, it still shows a decline of about 4% since the election was announced in early June.

Share prices of major banks such as Societe Generale and BNP Paribas also rose after an initial fall of 1%.

The dynamics of the euro and the upcoming actions of the left

Investors are worried that the left’s plans could undo many of President Emmanuel Macron’s pro-market reforms. In addition, the impasse in parliament could hamper further efforts to curb France’s public debt, which reached 110.6% of GDP in 2023.

After initially depreciating against the dollar and pound sterling, the euro stabilized at $1.0835 and 84.58 pence respectively.

The focus of markets is now on who will take over as Prime Minister of France.

Incumbent Prime Minister Gabriel Attal has already announced his resignation, but it is unclear whether the president will accept her resignation immediately given the difficulty of forming a new government.

Economists at Nomura predict that a centrist prime minister with a technocratic bent will eventually come to power. “The economic program of the left is in many ways a much bigger problem than the program of the right,” said Jan von Gerich, chief market analyst at Nordea. “While the left will not be able to form a government on its own, the outlook for France’s public finances is further weakened in light of these results,” he added.