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French markets led a European sell-off on Monday after President Emmanuel Macron called an early parliamentary election following a heavy defeat by Marine Le Pen’s far-right party in the EU parliamentary vote.
France’s Cac 40 fell 2 per cent to its lowest level since late February, with all but one of its 40 member stocks in negative territory and banks and utilities groups faring worst.
BNP Paribas was down 5.2 per cent, Société Générale fell 7.9 per cent and Crédit Agricole dropped 4.8 per cent. Insurer Axa fell 2.4 per cent while asset manager Amundi was down 2.6 per cent.
“There’s a ‘shoot first, think later’ mentality in markets this morning . . . but investors have to price a higher risk premium,” following Macron’s election call, said Emmanuel Cau, head of European equity strategy at Barclays.
The yield on benchmark 10-year French government bonds surged 0.09 percentage points to 3.20 per cent, close to the highest level since last November. Yields rise as prices fall. Benchmark Italian bond yields, a closely watched barometer of Eurozone political risks, rose 0.09 percentage points to 4.04 per cent.
Macron’s election announcement came after exit polls showed the far-right Rassemblement National secured a third of the vote in France, more than double the 15 per cent achieved by the president’s centrist alliance.
The European parliamentary election came only a week after S&P Global downgraded France’s sovereign credit rating to double-A minus, citing concerns about its budget deficit.
“Macron’s gamble will not increase the probability of French fiscal consolidation,” said Cedric Gemehl, analyst at Gavekal Research. “The current plan to cut the public deficit from 5.5 per cent of GDP in 2023 to 3 per cent in 2027, did not look credible to begin with. It is less so now.”
Elsewhere in Europe, the yield on 10-year German government bonds rose 0.03 percentage points to 2.64 per cent.
The region-wide Stoxx Europe 600 lost 0.8 per cent, Germany’s Dax fell 1 per cent and London’s FTSE 100 dropped 0.4 per cent.
The shift to the far right in the European election had been well telegraphed and was broadly in line with the polls, according to the latest estimates.
Cau said a major policy U-turn seemed “unlikely” but key implications “may potentially be a tougher stance on immigration”.
In currency markets, the euro fell 0.5 per cent against the dollar to $1.075.
“Political uncertainty in Europe, at a time when the US economy continues to perform well, weakens the case for holding anything other than the high-yielding dollar,” said Chris Turner, head of FX strategy at ING.