[ANALYSIS] French Election, Round Two: NFP comes out on top with Macron’s ENS in second and RN in third

Results

• Confirmed Results: NFP 182, ENS 168, RN 143, LR 45, Ind. right 15, Ind. left 13, Ind. centre 6, Others 5.


• As a reminder, 289 seats are needed for a majority and as such no party hit the threshold and France enters another period of hung parliament.


• Results are significantly different to the final polls before Sunday which had RN on 190-220, NFP 159-183 and ENS 110-135. The main surprise is the relative resilience of ENS which has come at the expense of RN and ultimately resulted in left-wing NFP in a commanding position.

Market Reaction

• CAC 40 Sep’24 -0.6%


• OAT Sep’25 opened with downside of 46 ticks, OAT-Bund 10yr yield spread at 70.70bps vs a 67.70bps close on Friday.


• EUR/USD down to a 1.0803 base, has lifted circa. 15 pips off this.

Initial Remarks

• President Macron has yet to comment on the results, having said he will wait for all results to come in and formulate his thoughts on the next steps before commenting. The timing for this is currently unknown.


• Incumbent PM Attal, Ensemble (ENS) leader, has pledged to offer his resignation to President Macron.


• On the left, France Unbowed (LFI/FI) leader Melenchon said the result is a clear defeat for Macron and as such PM Attal must go, and that he would not enter into any deal with Macron. Adding that the NFP will implement “nothing but its program – all of its program”.


• Elsewhere, Socialist Party’s (PS) Faure said they would follow the “compass” of the NFP but that it is now the group's task to “find a path” which will respond to the public’s needs.


• Communist Party (PCF) head Roussel lost his seat in the first round and offered only limited remarks. It is currently somewhat unclear as to what the leadership structure within the Communist Party will be.


• While Ecologists’ (LE) Tondelier has said it will take some time for the NFP to decide on who the leader will be and what the next steps are.


• On the right, National Rally (RN) figurehead Le Pen said “the tide is rising…it hasn’t risen high enough this time, but it is rising”. While President Bardella said the left wing/centrists agreement will not make any progress and pledged for RN to be there until the eventual victory.

Next Steps

• The first step is for President Macron to speak. Pre-election he committed to remaining in position until the end of his term in 2027, this is assumed to still be the case. If it is, we then look to see if he has accepted the resignation of PM Attal (assuming it has been formally offered by the time Macron speaks). Thereafter, if Macron has any thoughts/propositions on who the next PM should be. However, the strength of NFP in the hung parliament means Macron’s ENS is relegated to the junior partner in any left-wing/centrist coalition and as such while Macron may have some influence over the eventual PM, he will likely have to accept whatever candidate they propose.


• The main point of consideration/stumbling block on the NFP and ENS coming to some form of working agreement is the stance of LFI’s leader Melenchon, who has made it very clear that he will not work with Macron. Calculations of the NFP coalitions breakdown into individual parties, via Toluna Harris, show that ENS and NFP ex-LFI could get to just above the 300 seat point which would see them surpass the 289 majority threshold. However, it remains to be seen if the NFP’s collective leaders would be willing to split the coalition just weeks after its formation and what the ultimate fiscal agenda of such a government would be.


• As such, it appears as if France is in for a period of even greater uncertainty as the haggling between NFP members and with Macron’s ENS takes place with markets set to be particularly sensitive as to what degree the centrist block moderates the far-left component.


• Interestingly, former French President & Socialist leader Hollande was elected to the lower house as a member of the NFP alliance and could potentially be a pivotal figure in the negotiations between the centre and left. On this, Politico suggests that Boris Vallaud would be the most likely eventual PM under a Socialist-led NFP.

Next PMs

Politico is of the opinion that one of the following are the most likely next PMs:

• Jean-Luc Melenchon: a France Unbowed led NFP.


• François Ruffin: previously aligned with Melenchon, could be see as a leader which represents the majority view of NFP but one who is much less divisive than Melenchon.


• Boris Vallaud: a Socialist-led NFP


• Laurent Berger: a non-political appointment. Berger is recognised, by both the left- and right-wings, as someone who can create consensus and bridge gaps. However, Melenchon would likely oppose his moderate stance.

Fiscal Overhang/Market Outlook

• The main point of concern for France heading into the legislative elections was the tense fiscal backdrop. As of 2023, France had a public deficit at 5.5% of GDP with public debt standing at 111% of output; the rule for EU members is that the public deficit cannot exceed 3.0% and public debt 60% of output. As such, the EU Commission said it is putting France (alongside six other nations) into excessive deficit procedure, deadlines for adherence are to be unveiled in November. For the pre-election government, Le Maire had pledged to bring the deficit/GDP ratio into line by 2027.


• NFP has sought increased spending and taxation with a focus on purchasing power and foreign policy/relations; for instance, one of their main campaign pledges was an increase to the minimum wage.


• Prior to the first round, Citi was of the view that the OAT-Bund 10yr yield spread under an NFP-led government which is looking to implement the vast majority of its manifesto (as LFP’s Melenchon has pledged will occur) would widen to 100-105bps if Macron remained or further to 130-135 if he departed. Elsewhere, JPMorgan looked for a spread of 65-75bps and EUR/USD at 1.0725 in the scenario of a left-wing government with a relative majority and Macron remains. Finally, NatWest markets were of the view that an NFP relative majority with Macron would see the spread around 93bps.

Sovereign Review Dates

• Fitch (AA-, Stable): 11th October


• Moody’s (Aa2, Stable): 25th October


• S&P (AA-, Stable): 29th November

08 Jul 2024 - 07:45- ForexData- Source: Newsquawk