European Stocks Dip Amid French Political Woes, CAC 40 Falls 1%

Key Takeaway

• European stocks are under pressure due to French political uncertainties, with the CAC 40 dropping over 1%, its largest two-day decline since July.
• The spread between French and German 10-year bond yields has widened to its highest level since March 2020, signaling investor concern.
• The euro has fallen by 0.5% against the US dollar, and French banks like Societe Generale are among the worst affected sectors.

French Political Concerns Impact Markets

European stocks are experiencing downward pressure, primarily driven by political uncertainties in France. The spread between French and German 10-year bond yields has widened to its highest level since March 2020. This widening spread is a key indicator of investor concern and has contributed to the decline in European equities. The CAC 40, France's benchmark index, has dropped over 1%, marking its largest two-day decline since July. Banks, particularly in France and across the broader Stoxx 600 index, are among the worst affected sectors. Despite a swift denial of rumors that President Emmanuel Macron was preparing to resign, market sentiment remains cautious. Analysts suggest that uncertainty is likely to persist at least until the first round of voting in the snap election on June 30.

Underperformance of French Stocks

French stocks have been underperforming their European peers, and the recent political developments have exacerbated this trend. The CAC 40 is currently the worst-performing major Western European benchmark this year. The index plunged as much as 2.4% in early trading, with all its components in the red. Banks such as Societe Generale and construction giant Vinci led the declines. The election uncertainty is expected to weigh heavily on domestic sectors. Concerns about public finances have also been heightened, especially after S&P Global Ratings downgraded France earlier this month. The broader Stoxx 600 index saw significant declines in construction, autos, and consumer products sectors. The recent European Union elections, which saw far-right and populist parties increase their share of the vote, have added to the market's woes. For carmakers, there is a potential push to delay the ban on the sale of new combustion engine vehicles from 2035 and an increase in import taxes on Chinese electric vehicles. Despite a supportive economic and earnings backdrop, the higher political risk premium is prompting traders to take money off the table.

Euro and Broader European Market Reaction

The political turmoil in France has also impacted the broader European market and the euro. French stocks have led a selloff in European equities, and the euro has dropped to a one-month low. The CAC 40 is down 2.1%, with bank stocks being the most affected. The euro has fallen by 0.5% against the US dollar. The legislative vote called by President Macron, following a significant defeat in the European Parliament election, has added to the market's uncertainty. The CAC 40's 12-month forward price-to-earnings (P/E) ratio is approximately 13.7, which is below its 10-year average of around 14. This suggests that the index is poised to become even cheaper and may continue to lag behind its regional peers.