French President Emmanuel Macron’s centrist alliance and the left-wing New Popular Front are weighing whether to pull candidates from the second round of the legislative election on Sunday to keep the ascendant far-right National Rally out of power.

Marine Le Pen’s National Rally dominated the first round of voting Sunday, locking up 33.2% of the vote, according to interior ministry figures. The New Popular Front got 28% and Macron’s coalition got 20.8%. Markets rallied after National Rally recorded a smaller margin of victory than some polls had indicated and as mainstream parties began exploring ways to keep the far right from securing an absolute majority.

Winning an absolute majority of seats in the second round would hand the premiership to National Rally President Jordan Bardella and assure the party’s ability to easily pass legislation. Traditionally, France’s mainstream has banded together to keep the far right - which has never held power in the modern French republic - out of government.

“The lesson of today is that the far right is at the gates of power,” French Prime Minister Gabriel Attal told supporters Sunday night. “Our objective is clear: to prevent the National Rally from having an absolute majority.”

France’s CAC 40 index jumped as much as 2.8% in early trading, led by banking stocks such as Societe Generale SA, up 6%. French sovereign bonds also gained. Meanwhile, the euro added 0.5% for its biggest intraday gain in more than two weeks.

French stocks are still about 4% lower than when Macron called the vote, having reversed just a third of their selloff of the past three weeks.

Markets have been in turmoil since Macron called the snap election on June 9. The extra yield investors demand to hold 10-year French bonds over safer German debt rocketed to more than 80 basis points, levels last seen during the euro area’s sovereign debt crisis. The euro fell to its lowest since early May.

The French political world is now embarking on an intense two-day period of horse trading as each party tries to maximise its chances in the final ballot next weekend.

In more than half of the 577 constituencies, three people qualified for the runoffs. In those situations, the third-placed candidate can withdraw to boost the chances of another mainstream party defeating the National Rally.

The deadline for filing papers for the second round is 6pm on Tuesday, and at that point the picture will become clearer.

Jean-Luc Melenchon of the New Popular Front, an alliance of left-wing parties, said that he would encourage third-placed candidates from his group to withdraw, while Macron himself released a statement calling for “a broad, clearly democratic and republican alliance for the second round.”

Macron’s Renaissance party said it would pull third-placed candidates where they placed third to help those who respect “the values of the republic” beat the far right.

That’s the catch though - Melenchon’s France Unbowed has proposed a raft of spending that would flout European Union budget rules and potentially alarm investors. So it’s not clear whether Macron’s party will withdraw in races where the far left would benefit.

French Finance Minister Bruno Le Maire was among those saying he would not call for voters to pick France Unbowed candidates in the second round. Macron’s first prime minister, Edouard Philippe, has also said no votes should go to Melenchon’s party.

“France Unbowed is a danger for the nation, the National Rally is a danger for the republic - you don’t choose one danger in favour of another,” Le Maire said on France Inter radio Monday. “In politics you have to take positions of principle, not of circumstances.”

In an early sign that Macron’s team is seeking to build alliances with the left, the prime minister decided Sunday evening to suspend the implementation of an unpopular change to unemployment insurance. The government had said the plans would encourage people into work by paring back the generosity of welfare, but opposition parties widely criticised the move at a time when joblessness has risen.

Even though Macron’s presidency isn’t formally at stake - and he’s said he has no plans to resign - Sunday’s result indicates it’s likely he’ll either have to share governing responsibilities with Le Pen’s group or manage a parliament that is basically gridlocked.

An absolute majority by the National Rally would set up Bardella to become prime minister in a power-sharing arrangement called cohabitation - when the president and premier are from different parties. Bardella has sought to assuage voters by saying his party would take a responsible approach to economic policy, but has offered little in the way of detail.

The far-right party opposes most of Macron’s priorities, from migration and pension reform to strengthening the EU, and investors would prefer gridlock. The National Rally has said that it won’t lead the next government unless it has full control of the legislature.

If alliances forming to block Le Pen from absolute power start to look credible, French markets would likely recover, according to Kathleen Brooks, research director at XTB.

“A hung parliament could make it hard to get anything done in France in the current parliament, which is exactly what the markets would like,” she said.

  - Bloomberg