Source: Bloomberg

Author: William Horobin, Alice Gledhill

After the first round of the National Parliament held in France in advance, the possible results in the future will be reduced to two types, and both of which indicate that investors will face long -term uncertainty.

The Kuomintang National Alliance and its allies led by Marina Le Pen leader in the first round of voting are significantly ahead. At present, it is the only hope that after the second round of voting, the absolute majority of parliamentary seats are controlled to control the next government.The camp.

Bonds: In the absence of a majority of parliament, Jefferies predicts that French Treasury bonds have fallen at 60-65 basis points compared to German Treasury bonds, but they fall to 40-50 basis points before the election. In view of financeThe challenge is unlikely

Stocks: As the spread of bonds narrows, the stocks with the largest decline in the past three weeks may rebound due to pressure relief.The banking industry may have the biggest fluctuations because they are the most sensitive to bond yields.Toll road operators will also get some relief, and international companies shares that are sold without differences may also benefit.

Bond: UBS said that in the worst case -the National Alliance clashed with the EU in terms of financial rules, and the rate spread may expand to 130 basis points

Stocks: This may extend the uncertainty around France and European stock markets, at least temporarily, because investors will want to leave the market to see what policies will be adopted.The French stock market may re -test the low point last week, and the market may perform badly.Of course, it is also possible that the financial space embarrassment forces the government to take responsible actions.

or, the hostile party with the help of tactical voting and forming alliances may be enough to prevent the above situation from occurring, thereby generating a number of parliamentary parliaments, of which the right wing occupies the most seats.

These two scenarios, no matter which one appears, it will mean that the government's stability, policies, and impact on the entire region are covered with cloudy clouds.The market response on Monday reflects this: the French stock market and the euro rose, and the difference between the yields of France and Germany's bonds narrowed to the lowest level in the past two weeks -but investors' doubts came back and the market rose fell.

"One thing is clear: politics is shifting from the center to the edge." Guenther Welter, a manager of the UnionState Investment portfolio in Frankfurt, said, "Governance will become more difficult.There is no obvious majority parliament "

Although the threshold for direct election in each constituency in the first round of voting is very high, candidates in the second round of voting can only be selected as a relatively large majority, which makes tactical voting a key consideration.The minimum estimation of the National Alliance seats on Sunday polls was 230 and the highest was 305. This interval spanned 289 required to obtain a majority of seats.

Unstable deadlock

In this case, the leader of the National Alliance, the leader of the National Alliance, will keep his promise and refuse to lead a government that does not master the majority of the National Assembly.

The imminent problem is that President Emmanel Macron may choose who is the prime minister.A non -political technical figure is a choice, but even such a candidate, it is difficult to obtain authority in the national parliament that blatantly anti -precision forces occupy.

A more political prime minister, such as a gentle school from the left, but it is still easy to be influenced by unrivaled voting and the split of the interim intermediate faction.

The president will be difficult to implement the reform agenda of his pro -business. The upcoming government has stopped the implementation of unemployment welfare reform on Sunday evening, which may be an early sign of the normal state.

The fiscal policy has been the concern of investors before the election, and the 5.5%deficit rate is much higher than the upper limit of the EU 3%.This may be a long -lasting pressure, because the budget bill is always most likely to cause factors that do not trust the government.This may prevent Macron's current team plan and be cut by the entire left -wing opposition.

"We may go to the situation of political deadlock and paralysis." Jefferies International chief European economist Mohit Kumar said, "Lack of reforms means that even after five years, we may still be higher than 3%of the European Union goals."

Bitter Governance

If the national alliance and allies have won enough support to form a government, then France will face the so -called "co -governance" situation, that is, the president controls the national defense and foreign policies, and domestic and economic affairs are controlled by the right wing.Such a two -party arrangement has been arranged before, but has not seen it for more than 20 years, and has never appeared between political opponents with such oppositions.

The members of Le Pen's affiliated party called on Macron to resign in this case, although he had stated that he would finish the second term until 2027.The president can dissolve the National Assembly again, but it cannot be dissolved twice within a year.

Having a majority of seats in the National Assembly may make the government more stable, but its policy prospects are unpredictable.Budget negotiations will become a key focus of the market.The National Alliance has promised to adhere to the same financial trajectory as the Macron government, but it may be difficult to achieve necessary expenditure reduction or increase taxes without violation of the commitment to voters.

France has faced the European Union's condemnation due to its huge deficit. In view of the previous position of Le Pen's opposition to the EU, the relationship between France and Brussels will be tricky at that time.She has launched an activity with withdrawal from the euro before.

"Most of the governments may publicly reject the European Union's fiscal rules, this is the biggest risk situation I envisioned," said Reinout de Bock, the head of interest rate strategy of UBS.

This risk seems to have faded, but the control of the National Alliance is absolutely a majority, which will make investors be vigilant with the potential confrontation with the president, which is the most worried situation in the market.The degree of selling in the market will depend on the position taken after it came to power.