By Samuel Indyk and Sruthi Shankar
LONDON (Reuters) - France's financial assets are stuck in a rut as a political stalemate and policy paralysis take hold, casting a shadow over the outlook for markets and deteriorating public finances.
Investors hoping to snap up stocks and bonds battered by President Emmanuel Macron's decision in June to call a surprise election may have a long wait.
The election delivered a hung parliament and weeks later France still has only a caretaker prime minister. Macron has slammed the door on a possible leftist government, despite the left bloc winning the most seats in July's second-round vote.
Meanwhile, Paris and Brussels remain at loggerheads over France's worsening fiscal situation, and prolonged political uncertainty and possible delay to next year's budget could push back any market recovery.
"Potentially, you have the capacity for French politics to look a bit bumpy again over the next few months," said Mark Dowding, chief investment officer at BlueBay Asset Management.
Here's a look at how French assets are faring and what's next:
1/ STUCK IN THE MUD
France's weak fiscal position looks set to keep government bonds on the back foot.
The risk premium, or spread, demanded by holders of French debt over safer German bonds is around 71 basis points (bps). That's higher than the 50 bps seen before the election, but down from 85 bps reached in late June - the highest since the euro zone debt crisis over a decade ago.
An S&P sovereign rating downgrade in May and a warning from Moody's in July suggest French borrowing costs will remain relatively high for now.
France's debt as a share of its gross domestic product stands at over 100%. Germany's stands at just over 60%.
"We think this will be a gradual move wider over time, in-as-much as we think that any move in spreads will be capped below 100 bps, beside a presidential election taking place," BlueBay's Dowding said, referring to the French/German bond gap.
2/ STABILITY, WHERE ARE YOU?
French equities have underperformed European counterparts since Macron's June 9 election announcement and an initial post-election relief rally fizzled out.
A rebound will remain elusive until the political deadlock breaks, analysts said.
The blue-chip CAC 40 index is 4.6% below levels seen in early June, while Germany's DAX is up 2% and the broader European STOXX 600 is little changed. French mid-caps, with greater exposure to the domestic economy, are down 8%.
"Markets maybe underestimated how difficult the political situation is," said Morningstar European equity strategist Michael Field.