Stocks, Euro Rise in Relief After French Election: Markets Wrap

(Bloomberg) — The prospect of French political gridlock sent European markets higher on Monday, with investors bidding up the euro and pushing the CAC 40 Index to its biggest gain since 2022.

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The first round of legislative voting showed Marine Le Pen’s far-right party winning by a smaller margin than some polls projected, suggesting that the path to an absolute majority may be tougher than expected. While many strategists suggest French markets are unlikely to return to previous highs, the prospect that extreme parties to the right or the left won’t gain control was enough to kickstart a rally.

“Markets are quite content there’s no apparent absolute majority,” Claudia Panseri, chief investment officer for France at UBS Wealth Management. “The most extreme scenarios for the spread have been excluded.”

France’s CAC 40 Index jumped as much as 2.8%. Banking stocks lead the advance in Europe’s Stoxx 600 Index, as French lenders Societe Generale SA, BNP Paribas SA and Credit Agricole SA all surged by more than 5%. The euro climbed to its strongest level since mid June. The spread between yields on French 10-year bonds and equivalent German debt narrowed to the lowest in two weeks, reflecting a reduction in risk perceptions.

In markets beyond Europe, US equity futures pared earlier gains to be little changed. Spirit AeroSystems Holdings Inc. rose 5.6% in US premarket trading after Boeing Co. agreed to buy back the supplier in an all-stock deal that values it at $4.7 billion.

France’s second round of voting will be held on July 7. The French political world is now embarking on a period of horse-trading. In constituencies where three people qualified for the runoffs, the third-placed candidate can withdraw to boost the chances of another mainstream party defeating the far right.

“With the result still uncertain for the second round, we are not in a rush to buy France and French names,” said Mohit Kumar, a strategist at Jefferies. “However, an event risk is likely out of the way with an even more reduced probability of a Frexit scenario. The results are better than fears that neither far right nor the far left would have a free mandate to implement extreme policies. Hence, the immediate reaction is one of a relief rally.”

A swath of data indicated the US biggest economy is cooling without lasting damage to consumers. US consumer sentiment declined by less than initially estimated on expectations inflationary pressures will moderate and the Fed’s preferred inflation gauge marked its smallest advance in six months. Treasury 10-year notes were little changed on Monday.

“Going into the second half, there’s a lot of election election uncertainty and we think the dollar will be the best risk-off hedge,” Alex Loo, foreign exchange and macro strategist at TD Securities, told Annabelle Droulers and Shery Ahn on Bloomberg Television. “We do like its appeal as a safe-haven currency.”

In emerging markets, the South African rand and bonds gained after President Cyril Ramaphosa announced a new cabinet that includes members of the opposition Democratic Alliance, considered business-friendly by investors.

In commodities, oil edged higher as traders assessed economic outlook and geopolitical risks in Europe and the Middle East. Iron ore rose amid tentative signs of recovery in China’s steel-intensive property market, and speculation that Beijing could do more to support the sector.

Key events this week:

Eurozone S&P Global Eurozone Manufacturing PMI, Monday
Indonesia CPI, Monday
India HSBC Manufacturing PMI, Monday
UK S&P Global / CIPS UK Manufacturing PMI, Monday
US construction spending, ISM Manufacturing, Monday
ECB President Christine Lagarde speaks, Monday
Bundesbank President Joachim Nagel speaks, Monday
RBA issues minutes of June policy meeting, Tuesday
South Korea CPI, Tuesday
Eurozone CPI, unemployment, Tuesday
Fed Chair Jerome Powell speaks, Tuesday
ECB President Christine Lagarde speaks, Tuesday
Australia retail sales, Wednesday
China Caixin services PMI, Wednesday
Eurozone S&P Global Eurozone Services PMI, PPI, Wednesday
Poland rate decision, Wednesday
US FOMC minutes, ISM Services, factory orders, trade, initial jobless claims, durable goods, Wednesday
ECB President Christine Lagarde speaks, Wednesday
New York Fed President John Williams speaks, Wednesday
Sweden’s Riksbank issues minutes of June meeting, Wednesday
Australia trade, Thursday
UK general election, Thursday
European Union provisional tariffs on China EVs set to be introduced, Thursday
ECB publishes account of June’s policy meeting, Thursday
US Independence Day holiday, Thursday
Thailand CPI, international reserves, Friday
Eurozone retail sales, Friday
France trade, industrial production, Friday
Germany industrial production, Friday
ECB President Christine Lagarde speaks, Friday
Canada unemployment, Friday
US unemployment, nonfarm payrolls, Friday
New York Fed President John Williams speaks, Friday