[ANALYSIS] French Election 1st Round: National Rally makes significant gains but the odds of another hung parliament have likely increased

Results:

• Exit polls have National Rally (RN) on 34.5%, the New Popular Front (NFP) on 29%, Macron’s Ensemble (ENS) on 21-23% and Les Republicans (LR) on 10%. Reminder, the results for RN include the wing of LR led by Ciotto that has pledged to support the party, the Les Republican results listed in this piece refer to the anti-RN wing.


• The breakdown of results has RN going into the second round with 1st place finishes in just under 300 constituencies, NFP has a 1st place finish in around 150 and a similar value for 2nd place while incumbent ENS topped just 60 constituencies but came second in almost 150 of them.


• When extrapolated into seat projections, there is a slight discrepancy between vendors with the forecast range for RN not encapsulating the 289 majority mark via the IFOP survey and France Televisions-Radio’s calculations; however, estimates from Elabe have an RN majority within the forecast range.


• Ipsos: RN 230-280 seats, NFP 125-165, ENS 70-100 & LR 41-61.


• IFOP: RN 240-270 and ENS 60-90 seats.


• Elabe: RN 260-310 seats, NFP 115-145 and ENS 90-120.


• Voter turnout was particularly high at around 65%, a 40-year record; such a turnout increases the number of three-way run-offs in individual constituencies. Reminder, if no candidate hits 50% of votes and 25% of registered voters then that constituency goes to a second round, in the second round the top two candidates go through alongside any others who attained the votes of at least 12.5% of registered voters. As such, the exit polls point to several three-way run-offs between RN, NFP and ENS, run-offs which will likely favour RN.

Macron/Left Wing:

• Immediately after the exit polls dropped, PM Attal outlined a broad call to the centre and left-wing. Calling for voters to prevent RN from winning a second-round majority, to facilitate this he has pledged to stand down ENS candidates who have no chance of winning in the second round to give the non-RN candidate the best chance of victory. Further to this, President Macron called for a wide-ranging rally behind clearly Republican and Democratic candidates for the second round of the French election.

National Rally:

• Le Pen claimed to have “practically wiped out” Macron’s camp and is hoping to have things in place so that Bardella will be PM. Bardella himself said that he would be a respectful PM in a cohabitation scenario with Macron, but would be prepared to stand his ground.

Market Reaction/Scenario Analysis:

• Overall, the reaction has been favourable with the CAC 40 Jul'24 +2.8%, EUR/USD at +0.5% 1.0767 and OATs +17 ticks and the OAT-Bund yield spread narrowing to ~73bps (closed on Friday at 80.1bps).


• The reaction is in-fitting with scenario analysis for another hung parliament. One that would likely see RN as the largest party but shy of an overall majority, with NFP in second place and ENS a relatively distant third. Under such a scenario, Macron would not be obliged to appoint RN’s Bardella as PM and instead could propose a candidate from the left, i.e. a NFP member, to work with him in a technocratic style government formed between NFP & ENS as an alternative to the right-wing. While another hung parliament is the market-friendly scenario, the longer-term trajectory remains uncertain due to the poor fiscal outlook for France which finds itself under EU Excessive Deficit Procedure. Reminder, NFP’s platform is for additional spending but also additional taxation.


• Further ahead, the outlook for France may well deteriorate under a technocratic style government as outlined above as the likelihood of any fiscal agreement to reduce the budget deficit has diminished when compared to the incumbent government; as a reminder, Macron’s centre was already seen being particularly strained into the next fiscal negotiations, a point which was cited as one of his reasons for calling the snap election.


• As such, CapEco writes that under a rejigged hung parliament which will face greater difficulty in passing budget cuts the debt/GDP ratio will likely increase further and as such their central scenario is for the OAT-Bund spread to settle around 100bp.


• The scenario, as some projections include, of RN attaining an outright majority is regarded as the least market-friendly, as surmised by S&P’s Gill (before the 1st round): Gill writes RN policies could “further drag on public finances and they could and would be a consideration for the sovereign rating."; on 31st May, S&P downgraded France to AA- (prev. AA) with a Stable outlook citing an expected debt increase from the budget deficit overshoot. Both Fitch (AA-, Stable) & Moody’s (Aa2, Stable) have cautioned about election uncertainty on the rating. Such an outcome could see a widening of the OAT-Bund spread, though the impact of this is somewhat dependent on whether Macron remains as President or not. Note, the potential reaction to an RN outright majority is seen as being similar to that of aN NFP outright majority.


• Under either a RN or NFP-led government which looks to push through their manifestos as they are Citi projects that the OAT-Bund spread could widen to 103bps or 133bps depending on whether Macron stays or not, vs the 72bps region at their time of writing.

Second Round

Into the second round, there are now three main points to look for:

• Whether Macron shows any sign of wavering from his pledge to stay as President irrespective of the result.


• The reception of NFP to the call from ENS to cooperate to prevent an RN outright majority, i.e. if they demand the appointment of an ENS PM or similar.


• Any signs of the non-RN friendly contingent of LR wavering from their position and joining forces with RN, as the addition of their 41-61 projected seats could be enough to secure an outright RN majority.

Timings

• The second round occurs on 7th July. Exit polls are to be released from 19:00BST/14:00ET with official results emerging from some constituencies immediately but the full picture will not be known until early-Monday.

01 Jul 2024 - 07:45- EquitiesResearch Sheet- Source: Newsquawk