EU Stocks Plunge 2.1%, Euro Falls Amid EU Election Results

Key Takeaway

• European stocks fell sharply post-EU elections, with the CAC 40 down 2.1% and major French banks dropping over 4%.
• The euro dropped 0.5% to its lowest level against the dollar in a month; French bond yields rose by 8 basis points.
• US equity futures dipped, while oil and gold prices remained stable amid global market reactions to European political instability.

European Stocks Decline

European stocks experienced a notable decline following the results of the European Parliament elections. French stocks led the selloff, with the CAC 40 index dropping 2.1%. The banking sector was particularly affected, with major French banks BNP Paribas and Societe Generale seeing declines of 4.23% and 5.15%, respectively. The broader Euro Stoxx 50 futures also showed a slight decrease. The election results prompted French President Emmanuel Macron to call for a legislative vote, adding to the market's uncertainty.

Belgium also faced political turmoil, with Prime Minister Alexander De Croo resigning after his party's poor performance in the elections. Despite these developments, the overall results were not far from what polls had predicted, and centrist parties still maintain control in Brussels. However, the Greens saw significant losses, dropping to sixth place from fourth in representation. Deutsche Bank economists, led by Marion Muehlberger, noted that while the elections did not cause a seismic shift in EU-level politics, they are likely to influence policy direction over the next five years. "Fears of a populist shock seem to have been premature, but they may serve as a barometer of where national politics is headed," they stated.

Euro and Bonds React

The euro fell to its lowest level against the dollar in about a month, dropping 0.5% to 0.8457 pounds, marking the biggest daily drop since March 8. French government bonds also declined, with the yield on the French 10-year bond rising 8 basis points. This decline outpaced losses in German bonds. The Bloomberg Dollar Spot Index rose for the third consecutive day, and US 10-year Treasury yields increased by 1 basis point to 4.45%.

ECB speakers, including Government Council member Peter Kazimir, largely went under the radar. Kazimir mentioned that the September meeting would be crucial in determining whether to cut interest rates again. The market's reaction to the political developments in Europe was evident, with the euro's decline and the rise in bond yields reflecting investor concerns about the region's political stability.

Market and Commodity Movements

US equity futures were in the red, with S&P futures and Nasdaq contracts holding steady. Japanese equities posted gains, while the Kospi index in South Korea dropped. Markets in Hong Kong, China, Taiwan, and Australia were closed. Oil prices remained relatively stable, with WTI crude trading near $75.50. Spot gold was steady around $2,296 per ounce.

The political developments in Europe had a ripple effect on global markets. The Bloomberg Dollar Spot Index's rise and the slight increase in US Treasury yields indicated a shift towards safer assets. Meanwhile, the stability in oil and gold prices suggested that commodity markets were less affected by the immediate political turmoil in Europe.

Street Views

• Peter Kazimir, ECB Government Council Member (Neutral on interest rates):

  "The September meeting will be key to determine whether to cut interest rates again."