While the National Rally (RN) came out on top in the first round of French parliamentary elections on 30 June and, according to the polls, was expected to win the most seats in the National Assembly in the second round, the left-wing alliance came out on top on Sunday 7 July, followed in order by the president Emmanuel Macron’s party and the RN. The new French political landscape is fragmented to say the least and, at the time of writing, it is still unclear who will be the new prime minister following the unsurprising resignation on Monday morning of Gabriel Attal, the current PM.

However, a hung National Assembly means for the markets that, firstly, compromises have to be sought between the parties to try and pass legislation. Secondly, the risk of unorthodox or anti-market policies being implemented is diluted. And thirdly, that the impact on markets across the different asset classes in France and Europe, after an initial reaction, could be limited.

Where do we go from here?

Over the next few days, French political leaders will be meeting to seek common ground in building possible coalitions. Meanwhile, PM Attal will remain in place until a new prime minister is appointed by president Macron.

The political landscape in France is fragmented given that the distribution of seats between political parties (outside the current coalition) is fairly balanced. The RN alone is expected to win around 120 seats, Macron's Renaissance around 100 seats, and within the left-wing alliance, Mélenchon's France Insoumise (LFI) is almost on a par with the Socialists with around 70 seats. This is a political stalemate.

A National Assembly without a majority is likely to make it difficult to implement new policies, which of course is not positive in the medium term. But as the markets feared an absolute majority for the RN and/or the left-wing alliance capable of implementing unconventional policies, a deadlock in parliament where no party or alliance can govern alone is a better outcome, as it limits the risk of seeing major policy changes.

Filtering out the noise

The next PM is likely to come from the left-wing alliance which is the largest group in the National Assembly. While some of its policies, if implemented as planned (which is unlikely now), could have a significant impact on the direction of the French economy in the longer term, the most controversial measures, or those that could threaten France's fiscal prospects, are unlikely to be implemented. Even if the left-wing coalition holds together (see below), the more moderate Socialists are likely to outweigh the more radical LFI. Moreover, the left-wing coalition will also have to find common ground with other parliamentary groups. In any case, the new government will be subject to budgetary constraints. With a public deficit of around 5% of GDP, France recently received a formal warning from the European Commission for exceeding the EU deficit limit of 3% of GDP (opening of an excessive government deficit procedure). Moreover, a political stalemate de facto limits the risk of fiscal slippage, with unfunded spending plans, which could have caused stress in the French sovereign market and financial system. However, the fiscal consolidation plans requested by the EC are likely to be delayed.

Furthermore, after years of pro-growth policies implemented by Macron, the election result marks a turning point with a focus on more redistributive policies. But we think that the direction of the French economy in the short term is likely to remain stable because nothing will be done, either way.

Like its European neighbours, France is on the road to a gradual recovery, underpinned by activity in the services sector despite a manufacturing sector that is still in the doldrums, which is also the case on a global scale.

The European Central Bank began cutting interest rates in June and is set to continue in September and December this year. These rate cuts should once again support demand for credit and investment, as well as consumption.

Political uncertainty yes, market volatility less likely

Those who follow French politics closely will have noticed that the previous left-wing alliance, the Nupes, did not last long after the 2022 elections. It ended due to geopolitical discord in October 2023 following the tragic events in the Middle East.

There are many geopolitical risks - which is why we maintain a well-diversified strategic and tactical asset allocation - and they could lead to domestic political tensions. So could future political decisions. This means that political volatility could remain high in France over the coming months, but is unlikely to translate into market volatility.

As we noted earlier, the risks of fiscal slippage and market-unfriendly policies are limited, and the macroeconomic outlook for Europe and France is gradually improving. Growth is picking up, inflation is close to the ECB's 2% target and interest rates are falling. French equities have already fallen, Franco-German government bond spreads have widened and the euro has also fallen.

We believe that the worst is behind us and the markets had already taken on board the scenario of a hung parliament. Despite some political uncertainties, and perhaps with volatility emerging temporarily, we believe that the markets will now be supported by improving fundamentals in the European economy.

Nicolas Sopel is head of macro research & chief strategist, Luxembourg, at Quintet Private Bank. The comments and views expressed in this document are those of the author at the date of this article and are subject to change. This article is also of a general nature and should not be construed as investment, legal, tax or accounting advice.