CAC40 index surges after first round of French elections

Far right makes strong gains in first round of voting

The first round of French parliamentary elections has seen Marine Le Pen's far-right Rassemblement National (RN) party win 34.5% of the vote, according to projections. The leftwing Nouveau Front Populaire alliance came second with 28.5%, while President Macron's Ensemble alliance secured 22.5%.

The RN is projected to win between 230 to 280 seats, potentially even securing a majority in the 577-seat National Assembly. This outcome could force Macron into a "cohabitation" power-sharing arrangement.

Voter turnout was high, with 59% casting ballots by 5pm. The RN's popularity spans most age groups and is strongest among disadvantaged voters and in rural areas.

What happens now?

The next round of voting takes place on 7 July, and is likely to see plenty of tactical voting as the far left and centrist parties seek to co-operate in preventing the RN from winning an absolute majority.

While 37 RN candidates, including Marine Le Pen, won their constituencies outright, it is estimated that 285-315 seats are still three-way contests, making a prediction for next Sunday’s result difficult.

Markets worry about far-left resurgence

For financial markets, the prospect of political instability in France has been a major driver of losses for the CAC40 and a surge in French bond yields. While there is a possibility that Macron and the RN could work together in the short-term, what seems to bother investors is the potential size of the far-left bloc in the National Assembly.

This would likely frustrate the government’s legislative agenda yet further and reduce the scope for Macron and the new cabinet to cut spending and bring the French deficit under control. This risks a new eurozone crisis, as markets sell bonds and push bond yields higher, increasing the cost of borrowing for France.

In such a scenario, the euro would likely fall further, as would the CAC40 and other major European indices, at least until the European Central Bank (ECB) steps in to calm markets.

CAC40 index – technical analysis

The result of the first round was in line with forecasts, and for now the CAC40 has surged. The index fell 9.6% from its May high to the low of early June.

For the moment this low around 7470 has held, and the price has now rallied back to the 7700 highs of the past week. This has no doubt rewarded brave dip buyers, but the uncertainty around the second round of voting means it may be too soon to suggest that the pullback has run its course.

In the short-term, the price could target the 19 April low at 7851, while beyond this it would target the declining 50-day simple moving average (SMA), which is currently sitting at 7941. The risk for bulls is that the index rallies this week and then falls next week, perhaps in the wake of a strong showing by the Far Left.

It should be noted that just 5% of the CAC40 is trading above their 50-day SMA, and this suggests there is substantial room for a rebound, in the short-term at least.

A close back below the June low would ignite a new leg lower, which would then head towards the January low at 7280.

CAC40 chart