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French shares drop, bond risk premium rises after election result

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By Harry Robertson and Dhara Ranasinghe

LONDON (Reuters) -French shares fell, the risk premium of French bonds over German rose and the euro dipped on Monday, after elections left France facing a hung parliament and the prospect of taxing negotiations to form a government.

A surprise left-wing surge in Sunday’s election blocked Marine Le Pen’s quest to bring the far right to power in the National Assembly but no single group secured a working majority.

France’s blue-chip CAC40 index dropped 0.6% and the gap between Germany and France’s 10 year bond yields widened by two basis points to 70 bps.

That spread reflects the premium investors demand to hold French debt rather than Bunds. It widened to above 80 basis points in the build to the election, its highest since the euro zone crisis in 2012, as investors feared a far-right majority that could implement high spending policies.

French government bond prices dipped, pushing the yield on 10-year OATs up 3 bps at 3.24%

Opinion polls had forecast Marine Le Pen’s far-right National Rally (RN)would be the largest party, yet the election leaves France’s 577-seat assembly divided in three big groups – the left, centrists, and the far right – with hugely different platforms and no tradition at all of working together.

Yet investors also have concerns that the left’s plans could unwind many of President Emmanuel Macron’s pro-market reforms and believe a gridlock could end attempts to rein in France’s debt, which stood at 110.6% of gross domestic product in 2023.

“It’s going to be very hard to actually go ahead and pass any policy and bring about any progressive reforms because each party’s vote is split and no one has an absolute majority,” said Aneeka Gupta, director of macroeconomic research at WisdomTree.

She added, however: “I think the markets will be happy we’re avoiding this extreme situation with the far right.”

Banking stocks were particularly hard hit. Societe Generale (OTC:SCGLY) and BNP Paribas (OTC:BNPQY) shares were each down about 1%, compared with just a 0.4% drop in the broader STOXX banking index.

The euro dipped around 0.1% on both the dollar and sterling and was at $1.0822 and 84.53 pence, respectively.

“It looks like the anti-far right parties really got a lot of support,” said Simon Harvey, head of FX analysis at Monex Europe.

“But fundamentally from a market perspective, there’s no difference in terms of the outcome. There’s really going to be a vacuum when it comes to France’s legislative ability.”

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