Analysis
July 2, 2024
The second round of the French legislative elections took place on Sunday 7th July, following a first round on 30th June.
The first round saw an extremely strong showing by the right-wing National Rally (Rassemblement National, or RN). The RN, in a union with allies in the Republican Party, came first with 34% of the national vote. Extensive tactical voting in the second round saw the RN pushed into third place in terms of overall seats, behind the left-wing New Popular Front (Nouveau Front Populaire or NFP) and President Macron’s ruling Ensemble party. The result makes it extremely difficult to form a governing coalition capable of leading the country. You might expect this would lead to market turmoil, and in some markets, there was.
The Euro saw some weakness at the beginning of the week, but so far, French stocks have held up, with the CAC40 trading sideways in the days following the election. It looks like CFD traders can expect volatility, but not catastrophe, as markets accept the reality of ongoing political instability.
Legislative elections elect deputies to the lower house of the French government, the National Assembly. This is the body responsible for the day-to-day governance of the country, and its prime minister is usually chosen from the largest party in the chamber. However, it’s possible to govern France without an absolute majority in the National Assembly, instead using presidential decrees to force through legislation.
In recent years, President Macron has used these decrees to push through unpopular reforms, including increases to the retirement age of state employees. This was extremely unpopular and contributed to a poor showing for his centrist liberal allies at the 2024 election.
Multiple sides are claiming victory. The group of allied leftist parties won the greatest number of seats, and hope to choose the eventual prime minister, but the RN significantly improved its 2022 score and is by far the largest single party. Macron’s group performed better than expected and won far more seats in the second round than predicted. But because none of the three groupings have enough seats to govern with an absolute majority, the difficult process of building a coalition will begin. Macron has refused to work with the National Rally, and is reluctant to work with one of the constituent parties of the NFP, La France Insoumise. So far, he has not indicated who he will support as prime minister.
The French constitution gives significant power to the president, who can govern the country without much input from the National Assembly. That means a hung parliament is not a catastrophe (unlike the British system)and President Macron will be able to push through much of his agenda despite opposition from the left and right. France must wait a year before the next legislative election, so for the next 12 months they are stuck with the current crop of deputies and their policies.
Political uncertainty normally pushes markets into risk off territory, but not this time. Judging by the reaction of the CAC40 and EUR, the first round strong showing for RN did not concern traders. After the first round results, markets reacted positively to the chance of a clear majority. But the second round threw many assumptions of the first round, into question, and markets responded accordingly. Trading sessions on the 8th and 9th saw Euro wobbles and some rotation into safe haven assets, including the Swiss Franc. But in both rounds the overall market reaction was muted, and in stocks slightly positive.
Uncertainty was felt the most in the forex market. The EUR sold-off lightly after the second-round results, and investors rotated into JPY, GBP, and CHF. French stock performance was more robust, with markets shrugging off uncertainty to deliver strong performance after the election. Bond yields have moved into a higher range, reflecting long-term anxieties about the French budget deficit.
CFD traders often seek out volatile markets. 2024 is a bumper election year around the world, with major votes in the EU, UK, and US. All these elections are moments where volatility can spike, as investors and traders react to changing conditions and rebalance portfolios.
The French snap elections were chaotic, with unexpected results in both the first and second rounds. And yet, market reaction in the days following the results has been quiet. It seems that – in France at least – traders are simply used to political instability, and continue to trade based on the underlying fundamental and technical factors that move prices in stocks, bonds, and other asset classes.
Who won the French legislative elections in 2024?
After the latest round of French elections, a coalition of left-wing parties is the largest group in the National Assembly, but no group has an overall majority. The first round saw the right-wing National Rally (RN) and their allies in the Republican Party take 34% of the vote. However, tactical voting in the second round pushed the RN to third place in overall seats, behind the left-wing New Popular Front (NFP) and President Macron’s ruling Ensemble Party. The RN is now the largest single party, but in third place behind the liberal and left-wing coalitions. None of the three groups is large enough to govern alone, so it France will likely experience a minority government.
What are legislative elections in France, and why do they matter?
Legislative elections in France elect deputies to the National Assembly, the lower house of the French government. This body is responsible for the day-to-day governance of the country. The Prime Minister is usually chosen from the largest party in the chamber, though this is not a legal requirement. Although it is possible to govern without an absolute majority in the National Assembly using presidential decrees, this has the potential to be unpopular, so the result of the election will make the next years more difficult for President Macron.
How did the markets react to the election results, and what should traders look out for?
The market response to the election results has been mixed. The CAC40, a benchmark French stock market index, traded sideways after the elections. Initially, the strong showing of the RN in the first round was positively received by traders. However, the uncertain outcome of the second round led to some volatility in the Euro and a move towards safe haven assets like the Swiss Franc. Despite this, French stocks have shown resilience and performed strongly post-election. It seems markets are getting used to political instability in France, and trading instead on technical and fundamental factors