Banking shares led a surge in French stocks and the premium investors demand for holding the country's bonds plunged on Monday following a far-right win in Sunday's first round of voting that somewhat eased investors' uncertainty.
Marine Le Pen's National Rally (RN) party and its allies scored a historic win on Sunday, but the final outcome will depend on days of alliance-building and next week's parliamentary election run-off.
The CAC 40 (.FCHI) jumped 1.6% compared with a 0.5% rise in the regional STOXX 600 (.STOXX), making the Paris blue-chip index the region's best performer. But it is still 5% below where it was prior to June 9, when President Emmanuel Macron called the election.
French assets have been battered since then, as the prospect of either the far right, or far left, gaining a majority raised the risk of a swell of spending that could undermine the government's fragile finances.
Shares in the country's three largest lenders, BNP Paribas (BNPP.PA), Credit Agricole (CAGR.PA) and Societe Generale (SOGN.PA) rose between 4.1% and 4.7%, while the cost of insuring their bonds against default fell to its lowest in two weeks.
"The result is probably better-than-feared, but not as good as the status three weeks ago pre-elections," Jefferies chief economist Mohit Kumar said.
"We could still be looking at the next few years of political paralysis in France with a stalling of the reform process. However, any fears of Frexit or a euro area breakup would be unfounded," he said.
BONDHOLDERS RATTLED
French 10-year government OAT bond prices reversed earlier gains, pushing yields up by 4 basis points to 3.33%, their highest since November.
The premium French bonds command over German , a measure of how much more return investors want for taking on extra risk, narrowed by 5 bps to 75.3 bps. The spread, which traded above 82 bps last week at its highest since 2012, was below 50 before Macron set the date for Sunday's election.
"All told, the only certainty is uncertainty. OATs can tighten a little relative to Bunds, but only to a limited extent, with the future for France still unclear and political risk high. Reduced contagion risk should support non-French European sovereigns," Alex Everett, investment manager at abrdn, said.
The RN and its allies had 33% of the vote, followed by a leftwing bloc with 28% and Macron's centrists with just 20%, official results showed on Monday.
"A hung parliament remains the most likely outcome. Whereas RN might possibly still win an absolute majority of seats in the second round, this now looks even slightly less likely than it did before," said Holger Schmieding, chief economist at Berenberg.
"The tail-risk scenario that the united left could take power and implement its costly agenda seems to have receded further," he added.
The euro , meanwhile, rose by as much as 0.6% to a two-week high of $1.07705. Against the Swiss franc - often used as a safe-haven alternative - the euro rose 0.68% to 0.96905 francs, its highest since June 7, before Macron's shock election call .
