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Upsets still do happen in politics

It was supposed to be Le Pen’s coronation and it ended up being anything but that. Her National Rally (RN) faction was handily defeated over the weekend as the French people rejected a far-right government. The combined efforts by Macron’s Ensemble bloc and the leftish coalition, the New Popular Front (NFP) worked wonders in creating a wave of anti-RN sentiment.

That resulted in Le Pen’s faction only winning some 143 seats, finishing the election in third place – even behind Macron’s coalition, which secured some 163 seats. Jean-Luc Melenchon’s NFP alliance is the top dog, set to secure some 183 seats.

Do be reminded though, that all of this falls well short of a majority. None of the above party comes close to the 289 seats needed for an absolute majority and that leaves a hung parliament as the likely decided outcome.

So, what does that mean and how does this impact markets?

The first key thing to note is that this likely leaves France in a state of political paralysis. Macron’s faction has long distanced themselves from the likes of Melenchon, so it will be tough to imagine them suddenly deciding to work things out. That despite their common ground of wanting to defeat the far-right. Something, something the enemy of my enemy is my friend.

This is quite the unprecedented situation for France as the country is not used to this sort of political scheming in trying to form alliances and a coalition to govern. So, unless someone is willing to drop their ego and ideals, a state of political fragmentation is likely to be observed.

That will mean it will be difficult for France to sort out domestic issues and also to resolve its fiscal concerns currently. Any government will find it extremely tough to pass the necessary budget cuts in order to try and abide by the EU’s fiscal rules. So, it means we are likely to see France lock heads even more with EU lawmakers over fiscal concerns down the road.

Besides that, we’re already coming to terms with the fact that Macron’s pro-growth agenda is now out the window. And both the leftist and far-right alliances are wanting to increase spending, so that raises more risks on the fiscal front.

The other big issue for Macron is that he is not going to be able to call for another round of elections to resolve this impasse for another 12 months at least.

As such, there might not be any immediate solutions if there is a political standoff that is putting parliament in a gridlock.

Looking at the impact on markets, the biggest concern here is that France isn’t going to be able to get much done politically moving forward. And that implies a rise in fiscal risks, which will not help with French bonds and domestic assets in general.

The euro is little changed today, recovering from its early gap lower. There might be some relief of it not ending up being a far-right leadership under Le Pen. However, I would argue that this situation is the worst of the two outcomes. That at least once the dust settles.

In turn, that might also invite pressure on French bonds and stocks in the bigger picture. So, that is something to definitely keep in consideration now when viewing the euro and regional assets.

This article was written by Justin Low at www.forexlive.com.

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