French stocks jump 2.5% as far right takes election lead but seen falling short of majority

French stocks staged a relief rally early Monday after results from the first round of the nation’s snap election raised expectations of a hung parliament.

The far-right National Rally party and its allies won 33.1% of the vote, the left-wing NFP alliance was second with 28% and Macron’s coalition secured 20%, France’s Interior Ministry said Monday.

France’s benchmark CAC 40 index was 1.9% higher by 8:47 a.m. London time, off earlier highs.

“The election, in the end, tells us pretty much what we knew before, which is that the most likely scenario remains a hung parliament,” Sebastian Paris Horvitz, director of research at La Banque Postale Asset Management, told CNBC’s “Squawk Box Europe.”

From a market perspective that is the “least bad” option, he added.

It comes after economists at Citi and elsewhere warned that an outright victory for either the far-right or leftist alliance could cause a severe market shock given their tax and spending plans, with the potential to spiral into a debt crisis.

“A hung parliament appears likely and would, we believe, be seen as a positive development for European assets, as markets would price in policies on tax and immigration that would more closely resemble the status quo,” Matthew Ryan, head of market strategy at financial services firm Ebury, said in a note Monday.

“Following their strong showing in the first round, the possibility of a majority for National Rally remains in play, however, which could act to cap gains in the euro in the coming days.”

The second round of the vote is due on July 7 and to win a majority, the National Rally would need to secure 289 out of 577 seats. Current candidates now have until Tuesday evening to confirm whether they will be proceeding to the final round.

Horvitz noted that a hung parliament is unusual in France.

“Generally you have a majority to govern France … After the second round, maybe we are not going to have such a majority. And so we have to figure out how France will be governed,” he told CNBC.

French 10-year bond yields hit their highest level since November 2023 on Monday, trading around 3.334%, while their spread with German bond yields also narrowed.

Horvitz added that French borrowing costs, which have soared versus Germany’s since the election was called, are likely to remain elevated. That will likely lead to continued pressure on assets linked to bonds, including bank stocks and some utilities, he said.