Macron gambled and lost. That much was clear heading into France’s elections this weekend. Macron’s party attracted only about 20% of the votes, behind Le Pen’s Rassemblement National (33.4%) and the left-wing coalition Nouveau Front Populaire (28.1%), Rabobank financial Senior macro strategist Bas van Geffen notes.

Policy paralysis remains a distinct possibility

“This morning markets mostly breathe a small sigh of relief as Rassemblement National did not get as much support as some polls had suggested. Le Pen’s party won 39 seats out of the 76 seats that were assigned outright in the first round. The Euro (EUR) strengthened somewhat, and the French CAC40 leads European equity markets higher.”

“But uncertainty remains very high into the second round of voting, in which the remaining seats will be distributed. Candidates could pull out of the race, to avoid splitting the vote. Centrist parties have historically banded together in such a way. Moreover, the left-wing coalition suggested that they may do so in order to block Le Pen from obtaining a majority in parliament.”

“Even so, yesterday’s polls made it clear that Macron will probably have to work with another party to legislate post-elections. So, although the budgetary risk of the left-wing Nouveau Front Populaire may have receded, policy paralysis remains a distinct possibility. That would slow down solutions for the structural problems that plague the French economy.”