Here's why the French vote sent European stock exchanges on a seesaw

Relief, confidence, but certainly not genuine euphoria. The only partly favourable reading that the markets have reserved for the results of the second round of the French legislative elections does not seem to close the parenthesis that had opened after the European vote and the unexpected immediate call to the polls by the president, Emmanuel Macron. Investors would certainly like to toast the 'narrow escape from danger' caused by the feared affirmation of openly anti-European forces from the country's extreme right, but in the end they remain cautious in the face of a scenario that remains more uncertain than ever, for France and by extension for the rest of Europe.

In fact, the balance of the day after the opening of the polls spoke of a rather restrained reaction on the European stock exchanges, with the Paris stock even closing down by 0.63% after a session characterised by continuous fluctuations. Piazza Affari fared better, with the Ftse Mib finishing just above par (+0.17%). Frankfurt was flat (-0.02%). More favourable in this respect was the attitude towards government bonds, for which both yields and spreads fell. For French OOTs, the spread against ten-year German Bunds has now returned to 65 basis points, while that for BTp bonds fell back to 137 yesterday. Yields on French bonds, however, remained firm on short maturities, generating an inversion of the curve on the 2-10 year stretch, reflecting the greater risk perceived by markets in the short term.

It is worth recalling how last week the market had basically already begun to anticipate a less turbulent scenario, after the desistance agreements between the candidates to avert the hypothesis of an absolute majority in the French parliament for the Rassemblement National. Paris equities had in fact recovered 2.6% from their post-European vote lows and Milan equities 4%, while sovereign spreads had jumped by half. Behind yesterday's reaction, however, the degree of investor unease in the face of a situation that remains unstable is evident.

The fact that the parties most oriented towards a cooperative attitude towards Europe obtained more votes than expected and that at the same time there is no clear majority in favour of an expansive fiscal policy was certainly a positive factor for the markets, but uncertainties remain. "The extreme left and the extreme right have been curbed, but the election results are not in favour of political stability or a promising reform agenda," acknowledges Vincent Chaigneau, head of research at Generali Investments, pointing out that "whatever coalition may emerge is likely to prove very fragile".

The subject of French debt and its sustainability undoubtedly takes centre stage in the considerations of analysts and also of the market players themselves. S&P Global Ratings, which had lowered its rating on transalpine government bonds by one notch to 'Aa-' just over a month ago and thus in 'unsuspected' times, fears, for example, that the new parliamentary scenario could further complicate the situation. "The current lack of visibility about the nature of the next government is creating uncertainty about the details of the economic and fiscal policy strategy," warn the rating agency's analysts, before shifting their attention to the Budget Law 2025, which is expected to be presented to Parliament in early October and which will above all "give an indication of the new government's willingness to reduce the large budget deficits and comply with EU fiscal rules".