France's upcoming election is rattling nerves and raising debt crisis talk

The sell-off in French stocks and government bonds after President Emmanuel Macron called a shock parliamentary election may have eased — but investors remain spooked ahead of Sunday's vote, with some warning of a potential debt crisis.

Recent polling suggests the far-right Rassemblement National (RN, or National Rally) party, led by Jordan Bardella, could win the most seats in the National Assembly, followed by the left-wing alliance Nouveau Front Populaire (NFP, or New Popular Front).

The centrist alliance — containing Macron's own Renaissance party — is seen coming third. Sunday's first-round vote will be followed by a run-off on July 7, and could result in a hung parliament.

This uncertainty — combined with the policy pledges of both the left and right — now hangs over markets.

The country's blue-chip CAC 40 index is heading for its worst month since May 2023, with major banks Societe Generale and BNP Paribas lower by almost 19% and 11% so far in June, respectively.

French bond yields — which move inversely to prices — have been relatively contained. But market watchers have highlighted France's borrowing costs versus its neighbors', particularly Germany's. The spread between French and German 10-year bond yields has grown to more than 71 basis points since the vote was declared, its widest in more than a decade, as investors bet Germany is lower risk.

National Rally "has been busy moderating its policy stance on all fronts – in a nod to the playbook that got Giorgia Meloni elected in Italy back in 2022," Viraj Patel, senior strategist at Vanda Research, said in a note Wednesday.

While the initial sell-off in French stocks was driven by fear of populist policies being introduced by Rassemblement National, "it's the policies