Highlights:

• The second round of the French election delivered a surprise, with the RN ending up as the third group (but the first party) in Parliament. The tactical dropouts have benefited the left bloc (NFP) and President Macron’s Ensemble.
• Three large blocs are now dominating the Parliament: the left, centre and extreme right. This makes it unstable, and difficult for a majority to emerge.
• We see two main scenarios. 1/ A centre-left majority may emerge, with a full or relative majority, depending on developments within LFI. 2/ A technical government, anchored at the centre. Below we discuss potential variations, and implications. The President has asked G. Attal to stay in “for now”. We suspect Parliament may topple this caretaker government around 20 July, although the opening of the Olympic Games on 26 July may extend its lifeline. 
• The extreme left and right have been tamed, but the electoral results do not support political stability nor a promising reform agenda. Hence the small relief rally seen through the second round may not see much follow-through. 
• As the UK government change had already been anticipated, the financial market’s reaction has been limited.

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