Five main potential scenarios. 1) If the results of the first round confirm current polls, we would expect a fairly muted market reaction on Monday. A hung parliament is likely priced in already, so may not necessarily bring much more near-term downside for risk markets, although it may not bring much upside either. Our assumption is that it would most likely result in a technocrat government that would try to maintain fiscal discipline (but it would be sub-optimal for political stability compared to the current situation). 2) A higher score for the RN that increases the chances of the party getting an absolute majority at the 2nd round would likely be risk-off initially (equities and eur/usd down, OAT spreads up) in our view, given concerns about fiscal credibility, EU fragmentation and a potentially confrontational cohabitation with President Macron. However, it is possible that RN may seek to reassure markets by backtracking on some of their most controversial economic policies in order to avoid a crisis. We think it is likely that they would aim to stay in power for the long run and build credibility to win the Presidential election in 2027. 3) A more favourable outcome for markets would be a relative RN majority that gives them a chance to form a coalition with some LR dissidents. Investors may see it as similar to the situation in Italy, which has been pretty stable since Meloni became PM. 4) The worst scenario from a market standpoint, in our view, would be if the far left scores much better than expected, given their anti-business and fiscally loose agenda. We would expect a sharp widening in spread, as well as much lower eur/usd and equity markets. 5) A higher turnout at the first round could bode well for Macron and give him a chance to form a coalition with centrists from the left and the right. This would maintain the status quo and be the most positive outcome for markets, likely to retrace most of their losses of the past three weeks. With many socialist MPs unwilling to endorse policies from the far left, and a majority of LR candidates against a coalition with RN, alliances could shift towards the centre into the second round. - Barclays Strategy
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