Future fulfilment contracts for French bonds, as well as the euro, retreated, while on the other hand futures for European shares went up as traders try to “eat” the results of the parliamentary elections in France yesterday (07.07. 24), showing a victory-surprise for the left alliance (p. New People’s Front). Future fulfilment contracts for government bonds retreated by 28 tackles in transactions in Asia, the common currency dropped 0.1% to approximately $1,0828, while futures contracts for the Euro Stoxx 50 index increased by 0.2%. The success of the Left threw the spotlight on its campaign for a sharp increase in state spending. The New People’s Front – which includes the Socialists and the far-left “Unsubordinated France” – won 178 seats in the National Assembly, according to the data collected by the Ministry of Interior. Marin Lepin’s National Alarm, which pollers last week saw winning the election, came third with 143 seats, while President Emmanuel Macron’s centrist alliance gathered 156 seats. While money managers have spent the last week about worrying about a Lepin-led government, the success of the Left will likely continue to concern the markets, as it amounts to a new dose of uncertainty in the second largest economy in the eurozone and because the co-argument is committed to a broad relaxation of fiscal policy. This would exacerbate fears about France’s already inflated balance sheet and put the country on a course of conflict with the European Union, which is already taking measures to limit the budget deficit. “French politics gets confused once again,” said Geoffrey Yu, a senior strategic analyst for Bank of New York Mellon. “On the basis of the results, the risks of an expansionary fiscal policy remain and may have increased at the margins.” However, the left alliance does not have an absolute majority, which limits its capabilities, and some strategic analysts estimated that a parliament without a vote would be a positive result for investors. French markets sank in June, erasing billions of euros from shares and bonds, as Macron’s early poll caused concern that the far right would take over power. However, during last week, traders reduced some of these losses, as polls showed that the National Alert would abstain from the absolute majority. French CAC index 40 last week deleted about half of the losses suffered after Macron’s announcement. The result is very different: Macron’s centre party – favored by investors – came in second place, despite his poor appearance in the first round of the vote. This could allow the president to form a central coalition. However, the inevitable political disputes and concern about the left’s influence in a parliament that will hang, could push upwards the yield of the country’s 10-year debt – known as OATs – by pushing spread against the safest German bunds to expand again. This spread had been reduced to close to 66 base points on Friday, after it had been launched to over 80 base points last month – levels last observed during the eurozone’s public debt crisis. The “shock result” could easily send the spread again over 80 basis points, according to James Rossiter, head of TD Securities’ global macroeconomic strategy. “The interest markets entered the election with the spread OAT vs bund pricing a scenario for a parliament with a dead end – but a parliament with a dead end led by RN rather than NFP”, he wrote in a note. The absolute majority of the Left was described by investors as the scenario they were most concerned about in the days before the first round of the vote. But this possibility was discounted after Lepin’s National Alert won convincingly the first round. Among his commitments, the left coalition wants to overthrow seven years of pro-business reforms and raise the minimum wage. To implement his policies, the left New People’s Front would require nearly 95 billion euros ($102 billion) in additional funds annually, six times the costs planned by Macron and his allies and nearly twice as much as the National Alert suggests, Institut Montaigne thought tank said before the vote. France has already faced a budget deficit that is 5.5% above 3% of the economic output allowed by the rules of the European Union. The International Monetary Fund predicts that – without further measures – debt will rise to 112% of economic output in 2024 and increase by about 1.5 percentage points per year in the medium term. S&P Global Ratings downgraded France at the end of May, stressing that the French government lost its goals in plans to contain the budget deficit after huge spending during Covid’s pandemic and the energy crisis. Vincent Juvyns, a strategic global market analyst at J.P. Morgan Asset Management, said tensions are possible with the reforms in which Macron has now pioneered being put in doubt, which will potentially harm the value of French bonds against their bonds. “The markets may require a higher margin as long as the new government has not clarified its fiscal position,” he said. “The European Commission and the rating houses are expecting 20 to 30 billion cuts, but the government should actually face a party that wants to increase spending by 120 billion.”