French stocks rallied Monday as the country’s snap legislative elections left no party with a majority in the National Assembly, even as investors warned of market turbulence in the coming weeks as political gridlock looms.

The CAC 40 Index reversed an early decline, rising 0.5 per cent at 11:51 a.m. in Paris, as dip buyers emerged, treating the election outcome as the “least bad” scenario. Even after a rally last week, the stock benchmark is still down 3.5 per cent from its level before President Emmanuel Macron called the election on June 9.

Anxiety is still high as traders fret government spending will pick up in coming months, heightening the conflict with the European Union over the budget deficit.

“There’s going to be some volatility in the days, weeks and months to come,” said Christophe Boucher, chief investment officer at ABN Amro Investment Solutions. “We’re going to stay on the side. We were underweight French debt and financials and we’re sticking to this position.”

The euro erased losses against the U.S. dollar. A key metric of bond market risk — the yield premium that investors demand to hold French government bonds over German securities — was little changed.  

Here’s what market participants are saying

• Bruno Cavalier, chief economist at Oddo BHF:

“Overall, the dissolution introduced a political risk and the result of the elections suggests that this risk will last until the next elections, whether they take place on the normal date or earlier than expected. The French risk premium has no reason to fall back to the level of a month ago when this political risk did not exist. Rather, there will be reasons for it to increase if the budgetary process falls behind schedule or if the chosen fiscal stance moves France away from a credible path of cleaning up public accounts.”

• Gilles Guibout, a Paris-based portfolio manager at Axa IM:

“This is unlikely to reassure international investors. One will have to wait to see what kind of government this could lead too. It is too early to gauge whether the NFP could implode, at the moment they can’t do anything. So it looks like we moving towards a technical government.”

• Ipek Ozkardeskaya, senior analyst at Swissquote Bank:

“Result could weigh on French bond appetite and keep the spread with the German yield above the pre-election levels and limit the euro’s upside potential. The market reaction was a swift fall in the euro at the open, the franc gained on the back of an early flow of capital to its safety. France went from favouring the far-right to giving support to the far left in just a week’s time. French are looking for solutions in two extremes and that’s not an ideal outcome.”

“In equities, shares of French banks will particularly be in focus as the left suggested raising banks’ mandatory capital buffers and transaction tasks, and will also be tempted to raise taxes on wealth, dividends and share buybacks.”

• Marina Zavolock, chief European equity strategist at Morgan Stanley:

“The unexpected layer of uncertainty, given the divergence from the polls, could drive short-term volatility.”

“The ultimate direction of markets will depend on the selection of a new PM, indication of any further coalitions (or not), and direction of policy making, all of which are as yet unclear. We remind that our EM election case studies suggest that markets tend to recover once election uncertainty passes.”

• Ulrich Urbahn, head of multi-asset strategy and research at Berenberg:

“We have bought already some French stocks after the first election dip. I think the downside for stocks is muted. However, the upside might be also limited given the still ongoing uncertainty, and given that stocks have already recovered somewhat before the second election round."

“While the ‘no majority’ outcome was expected, the direction of equity markets will depend on the selection of a new Prime Minister, the indication of further coalitions — or not — and the direction of policy making, all of which are still unclear.”

• Krishna Guha, strategist at Evercore ISI:

“The show of support for the left/far-left and calls by far-left leader Melenchon to enact the full hard-left NFP agenda will unsettle some investors. But we view the outcome as broadly market-friendly, with RN-related risks disappearing for now and the left/far-left NFP set to fall far short of a majority with essentially no prospect of being able to enact its agreed alliance agenda.”

• Emmanuel Cau, head of European equity strategy at Barclays:

“Election results bring more questions than answers. A hung parliament was largely expected, but markets are likely to worry about lingering uncertainty and political deadlock, as well as looser fiscal policy given the higher score for the left. But Macron’s party has done better than expected by the polls, which means he could form a wide coalition, which would likely be seen positively by markets. So games are still wide open.”

• James Rossiter, head of global macro strategy at TD Securities:

“Risks of a rising debt profile are unlikely to do EUR any favours in the months ahead.”

• Vincent Juvyns, global market strategist at JPMorgan Asset Management:

“The worst-case scenario of an absolute majority for one of the extremes has been brushed aside, so we could have a mini rally on a number of stocks. But the spread will likely widen in the days in the weeks to come as long as we have political and budgetary uncertainty. And this could last till the fall.”

• Kevin Thozet, a member of the investment committee at Carmignac Gestion in Paris:

“The worst-case scenario has been avoided, but the slow deterioration of public finance is marching on. And so irrespective of the level at which OATs will open, long rates should continue to rise.”

• Joachim Klement, strategist at Liberum:

‘’The exit polls point to a shock victory of the left-green alliance. However, this alliance will not get the absolute majority and will likely have to form a pact or even a formal coalition with Macron’s Renaissance bloc to form a government. On the one hand, this is good for France and the EU because it allows for Macron to govern from the center and make fewer compromises than with a RN government. On the other hand we should not forget that the leader of the left-green alliance, Jean-Luc Melenchon, is just as eurosceptic if not more so than Marine Le Pen. This outcome should be marginally positive for the euro and French stocks. However, we don’t expect too much upside since the French government will be split between two blocs that aren’t always looking eye to eye with each other.”

• Stephane Deo, a senior portfolio manager at Eleva Capital SAS:

“Virtually all the pollsters gave zero probability to this outcome. Nobody expected the NFP to be so high, but with a third of the seats it will be extremely hard if not impossible for most of their proposals to go through. So even if markets are initially concerned by these results, I think they could like the hung parliament scenario.”

• Diego Fernandez, chief investment officer at A&G Banco:

“As the market had already discounted over the last week, the risk of Le Pen’s majority disappears. Now a period of uncertainty opens, but the difficulties for the left to appoint a prime minister despite the electoral victory mean that populist measures that do not help will be discarded. Good for Europe.”

• Charles-Henry Monchau, chief investment officer at Banque SYZ:

“We note that within NFP, the socialist party PS and the Greens have a strong score relative to radical left LFI. As such, it is unlikely that LFI will be able to claim the prime minister seat. All in all, the result is rather negative for markets as the radical left and left NFP party program is somewhat of a flash back into the old French socialist program including retirement age at 60-year old, increase of the minimum salary, increase of taxes on the wealthiest 10 per cent and decrease the taxes of the other 90 per cent. This would be both inflationary and increase debt load and budget deficit”

• Frederique Carrier, head of investment strategy at RBC Wealth Management:

“The fact that the NFP would hold the most seats has not been telegraphed in markets, and markets might worry a little bit because although they don’t have a majority, their agenda is definitely to spend more and it’s not business friendly. We might still have a hung parliament, and that means that the fiscal situation is not going to improve. The spread of long-term French bonds versus German bunds had narrowed a little bit last week, but we’re likely to go back to a slightly wider spread while we try to figure out how chaotic this new government will be. The risk premium in France might rise a bit more. In stocks, the ones that interest us are global leaders and a chaotic France does not really impact them. If people throw in the towel and overreact, we would treat it as an opportunity to increase exposure. From an equity point of view, a lot of negative news has been priced in.”

• Holger Schmieding, chief economist at Berenberg:

“It could have been worse. Nervous is probably the best word to describe how markets may react on Monday. I do not see this as a reason for a major selloff. After all, Macron’s centrists also did less badly than expected.”

• James Athey, a portfolio manager at Marlborough:

“The market unwound a fair amount of risk premium and obviously was getting comfortable around the idea that there wouldn’t be a majority for the far right. But the left most certainly are a more concerning policy prescription from a fiscal policy standpoint. So the fact that they’ve performed so strongly should well be seen as a negative from where we were Friday at the close. But I say that with not much confidence because largely the market has a somewhat rose-tinted view of most of these sorts of scenarios, it looks for the positives, and it may well be that it latches on to the idea that nothing bad can happen because it’s such a fragmented result.”