LONDON (Reuters) -Banking shares led a surge by 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 jumped 2.7%, compared with a 1% rise in the regional STOXX 600, making the Paris blue-chip index the region's best performer.
French assets had been battered since President Emmanuel Macron's surprise June 9 decision to call a snap election, 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, Credit Agricole and Societe Generale rose between 4.8% and 7.0%.
"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.
French 10-year government bond prices edged up, pushing yields down by about 2 basis points to 3.272%, which helped narrow the gap between French 10-year debt and German.
The premium narrowed by 7 bps to 73.4 bps, set for its largest one-day drop since November 2022, but remained within sight of last week's 12-year highs above 82 bps.
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 0.63% to 0.9686 francs, its highest since June 7, before Macron's shock election call.
(Additional reporting by Alun John and Stefano Rebaudo;Editing by Helen Popper)
By Amanda Cooper
