Investors knew that 2024 would be a significant year for elections around the globe, but the stunning results from recent French elections is even more notable considering they were not on the calendar.

What happened?

After French president Emmanuel Macron’s centrist coalition faced a tough defeat in European Parliament elections, Macron made a surprising decision to hold snap legislative elections in a two-round poll that took place on June 30^th and July 7^th to test how the population responds. Unfortunately, that response was not in his favor.

In the first round of elections, Macron’s party fell to third place with the far-right National Rally (RN) party taking the lead and the left/far-left New Popular Front party taking second place. Voter turnout was surprisingly strong, the highest since 1997 at almost 70%. Turnout was similarly elevated in the second round, but this time the left/far-left New Popular Front party came out ahead with a relative majority. This prevented the far-right party from securing an absolute/relative majority, which would have fueled greater market concern, but still results in a hung parliament—or in other words, gridlock.

It’s unclear how this political sequence resolves in the short term. A grand coalition could be formed to expand the centrist party from the left and the right, or perhaps there could be new elections in a year. The result has surely weakened Macron’s coalition and will make it much more difficult to maintain his centrist policy positions. France now has two strong parties at both political extremes, which will make any new government tenuous and difficult to legislate.

What does this say about the global political climate?

While French politics are somewhat unique, the New Popular Front’s victory is the second win for a left-wing party so far this month after a strong defeat of the Conservatives in the UK. It’s not clear that this trend extends to the U.S. election in November, but it does showcase political attitudes we continue to see across the globe: voters are growing more frustrated with the status quo and are willing to try different, even dramatically different, political approaches. The rising tide of populism and polarization has also made legislating much more difficult, potentially hampering the ability of policymakers to respond appropriately to economic conditions.

Will this continue to weigh on European markets?

Volatility may remain elevated in European markets in the coming months, which could negatively impact sentiment towards European markets in general. However, markets responded favorably to the last round of elections due to a clear majority against the far right, Macron’s centrist party performing well and the potential for a more market-friendly center-led government to arise. This suggests Eurozone spreads should return to a lower volatility environment over the summer, even if France remains somewhat troubled. Moreover, the improving economic backdrop and attractive valuations in Europe more broadly, together with stronger EU institutional and ECB monetary backstops, could transform any election-related sell-off into a buying opportunity.

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