What a hung parliament in France could mean for markets

Initial indications on Sunday evening for the French parliamentary run-off vote threw up some big surprises, leaving political commentators contemplating a "hung parliament" scenario that could prove challenging for both policymaking and financial markets.

France's left-wing New Popular Front coalition is seen by some projections to gain the most seats in the election, with French President Emmanuel Macron's Ensemble party and its allies in second place, and with the far-right Rassemblement National coming in third. With none of the groups expected to hit the 289 seats needed for an absolute majority, gridlock could ensue over the coming weeks.

The euro slipped about 0.3% against the U.S. dollar in thin trading on Sunday evening after the exit polls were released.

In the run-up to the second round vote, analysts at Citi warned that stock markets may be slightly too optimistic about the French election and that "higher-probability outcomes" such as a deadlock "would imply somewhere between 5-20% lower equity market valuations."

"Combined with our finding that French equities tend to be more volatile than peers' around elections, this could be reason to expect additional choppiness from here ... For context, a 10% move in French equities is usually accompanied by an 8% move by the overall Stoxx 600," the analysts said in a note dated June 26.

Analysts at investment firm Daiwa Capital Markets also spoke of uncertainty if no single party managed to gain an absolute majority. In a research note earlier this week, the analysts said a grand coalition of the moderate left and center parties, a unity government or a minority government were all feasible outcomes.

"Regardless, uncertainty about the outlook for French policymaking is