European markets brace for political turmoil after French elections

European markets brace for political turmoil after French elections
European markets brace for political turmoil after French elections

The second round of the French elections has seen the far right fall. The left is in first place. Despite political uncertainties, the euro is reducing its initial losses.

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The uncertainty Politics will continue to drive market volatility in Europe following the surprising result of the French elections on Sunday. The right-wing coalition New Popular Front is the most voted force and has defeated the far-right coalition National Grouping which comes in third place.

The NFP gets 182 seats, while the centrist party of Emmanuel Macron secures second place with 168 seats. The extreme right of Marine Le Pen y Jordan Bardellaobtained 143 seats. The Prime Minister, Gabriel Attalhas submitted his resignation to President Macron.

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The division of political powers will increasingly cast uncertainty over critical policies, especially in the area of Public finances.

Euro swings amid political uncertainty

The euro weakened significantly against other G-10 currencies in early June when French President, Emmanuel Macroncalled for early elections after the leader of the far-right party, Marine Le Pendefeated him in the elections to the European Union Parliament.

The single currency fell as much as 2% against the US dollar to 1.0664 in the second half of June. The pair rebounded sharply to above 1.08 last week after the first round of French elections showed that the far-right Eurozone party had won the election. Le Pen did not achieve an absolute majority in Parliament.

However, Sunday’s result put the euro under pressure again, with the euro-greenback exchange rate initially opening lower at 1.08 before quickly rebounding to 1.0823 by 2:30am CEST.

The euro’s resilient move may suggest that investors are less worried about a left-led government than a far-right ruling party. future of France It will depend on the parties of leftincluding socialists, greens and the radical left of France Insoumise, remain joined.

Concerns about French public finances

One of the leaders of the left, Jean-Luc Melenchonfrom France Insoumise, advocated that the alliance govern the country and reject any negotiation with other parties. The manifesto of the alliance consists of increase public spendinglower the age of retirementupload the minimum salary and capping food and energy prices, which could lead to larger public deficits.

This will further worsen France’s financesas its deficit – 5.5% of economic output – is already well above the 3% threshold set by the European Union (EU) for 2023.

The EU subjected the country to a “excessive deficit procedure” in June, when French elections projected a losing position for President Macron’s liberal centrist party. France has to cut its deficits by 0.5% annually under the new rules, although there are no explicit recommendations on how countries should reduce deficits until a new commission takes office in November.

French markets may brace for political turmoil

European stock markets have rebounded sharply after last week’s sharp fall following the first round of French elections, as Le Pen’s far-right party was unlikely to gain monopoly power.

The French debt risk premiummeasured by the yield on 10-year government bonds, fell to 3.21% on Friday, after hitting an eight-month high of 3.37% earlier in the week.

Meanwhile, the hardest-hit sectors, such as banking stocks and green energy shares, saw the sharpest rebound. The French benchmark index, the CAC 40, rebounded 2.7% from its June low.

Investors may be relieved that the far-right party now has less possibilities of influencing government policiesalthough the left’s spending plans remain a threat to the country’s financial stability.

However, a dissenting government could be the best outcome for market sentiment, as neither the far-right nor left-wing coalition can easily convey their lofty spending plans.

 
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