Far right wins first round in France election

AMSTERDAM/LONDON (Reuters) -Marine Le Pen's far-right National Rally (RN) party won the first round of France's parliamentary elections on Sunday, exit polls showed, but the final result will depend on days of horsetrading before next week's run-off.

The euro gained around 0.23% to trade around $1.0736 in early Asia-Pacific trading.

European markets have been rattled since President Emmanuel Macron's shock decision on June 9 to call a snap election.

The prospect of a far-right, or leftwing win has unsettled investors, as both have pledged big spending increases, which could undermine France's already fragile finances.

COMMENTS:

PETER GOVES, HEAD OF DEVELOPED MARKET DEBT SOVERIGN RESEARCH, MFS INVESTMENT MANAGEMENT, LONDON:

"A hung parliament would appear to remain the base case, loosely in line with market expectations. That said, uncertainties are high and the NR looks like it will be the largest party in the new Assembly.

"We would caution about drawing too firm an inference about the exact seat projection, because the high turn out has seen an eruption of three-way contests. This complicates matters.

"How leaders respond and how alliances bear out will be significant for the end result. A hung parliament is far from politically ideal, but is not necessarily the most unfriendly market outcome.

"As such, OAT-Bunds may take some comfort, but we struggle to see a material and sustainable snap back."

FIONA CINCOTTA, SENIOR MARKETS ANALYST, CITY INDEX, LONDON:

“I think it’s a slight ‘well, there was no surprises’, so there was a sense of relief there. Le Pen had a slightly smaller margin than some of the polls had pointed to, which may have helped the euro a little bit higher on the open.”

“Attention now is on July 7 to see whether the second round supports an absolute majority or not. So it does feel like we’re a little bit in limbo, but relief that it wasn’t worse.”

DAVID MORRISON, SENIOR MARKET ANALYST, TRADE NATION, LONDON:

“One of the things you think about is this is going to be a big protest against Macron and a big positive for RN.”

“But, of course, it is going to take a little bit longer to really find out what that vote percentage of theirs is, because the polls really were very positive and getting higher and higher and Macron was getting around the 20% level and that was feeding into a lot of concern about France, Europe and the euro and a possible French version of Truss.”

“We’re not going to know any more before next Sunday. How is it going to go, if those three-way polls go to two, because there is a party that stands down to push back against RN, what is that going to mean? That is all open at the moment. What we’re going to be looking at is a bit of uncertainty across all European indices and the euro going into next week.”

MICHAEL BROWN, SENIOR STRATEGIST, PEPPERSTONE, LONDON:

"Perhaps the result isn't as bad as the market had feared. The exit polls... had Le Pen's party winning between 240 to 310 seats, so the midpoint of that is just shy of a majority."

"We've also seen a lot of rhetoric form other parties looking to perhaps pull out candidates to try and avoid the National Rally winning seats in the runoff next Sunday."

"The market may be taking a little bit of solace in that. But overall, the downside risks that were there on Friday at the close remain."

"The two most likely scenarios are either a majority for the RN, although the probability for that has decreased slightly... or we end up with a hung parliament and a stalemante situation which then goes into weeks if not months of neogitations to try and form a government."

"It's very much a case of wait and see where the actual results of the first round election do end up, because there are some pretty wide spreads in terms of the seat projections that have been extrapolated from the vote shares."

"Volatility in the euro and French assets in particular will remain relatively high over the next few days and into next Sunday."

PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:

"The overall results aren't far away from most of the polls but obviously because of the electoral system, we really don't have a very clear idea of what the seat distribution is going to be like."

"It's all in the balance. We may know a little bit more when we get the counts from the first round to see how many deputies have been elected in the first round and what the second-round fights are likely to be. So that might shed a little more light on the situation. But clearly, there are a number of question marks which will remain even after the result are in."

"Much would – because we don't know if they'll get a majority yet - depend on how the process of cohabitation is between a potential National Rally government and Macron himself. The question still very much there."

CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT:

"With this result, markets are looking into another week of really high uncertainty. Probably fear, as it is still possible for RN to gain an absolute majority next week."

"This is confirming what markets see as the most disruptive scenario."

"I would expect another widening of the (French-German bond) spread starting tomorrow and we might even see some minor drop in the CAC 40."

"We will have a lot coming up in the next days in terms of new polls showing what this could mean for the individual seats."

"From the markets point of view, a win by the leftwing bloc would have been an even worse scenario, even though from the start it was very unlikely."

(Compiled by Yoruk Bahceli and Amanda Cooper)