Dhara Ranasinghe and Amanda Cooper
LONDON/SINGAPORE (Reuters) – The euro fell while French stocks and bonds fell on Monday following President Emmanuel Macron’s decision to call early parliamentary elections after being crushed by the far right in European Union elections.
The euro fell as much as 0.6% to a one-month low of $1.0733 and hit a 21-month low against the pound of 84.49 pence.
French blue-chip shares fell 1.6% as lenders BNP Paribas (OTC:) and Societe Generale (OTC:) suffered sharp losses, marking the worst performing index in Europe. The European benchmark fell 0.5%.
French government bond prices also fell, pushing 10-year borrowing costs to their highest level this year at around 3.20%. Center, liberal and socialist parties were expected to retain majorities after European Parliament elections, but Eurosceptic nationalists made the biggest gains, raising questions about the ability of the major powers to carry out policy in the bloc.
Taking a risky step to restore power, Macron called parliamentary elections, the first round of which is scheduled for June 30.
If the far-right National Rally party wins a majority, Macron will be left without a say in domestic affairs.
“This is probably a bit of bad news for markets,” said Berenberg chief economist Holger Schmieding.
“It introduces an unexpected element of uncertainty.”
Britain will hold a general election on July 4 and crucial US elections in November, while markets have become fragile recently as expectations of a US rate cut have dimmed.
Kathleen Brooks, director of research at trading platform XTB, said in a note that the “shock factor” of Macron’s decision to call early elections will weigh on European markets on Monday, but who wins the actual vote could carry more weight.
“The question for euro traders and European stock markets is how radical will Marine Le Pen and Jordan Bardella be if they do well in the French parliamentary elections?” she said, referring to two far-right leaders in France.
DEMANDING CALL?
While euro and eurozone assets have been largely softened by a decline in Euroscepticism compared to the elections of the 2010s and early 2020s, the results and France’s unexpected reaction could be a warning sign.
Premium bond investors demanding to hold French government debt rather than benchmark German bonds hit their highest level in six weeks, rising 7 basis points (bps) to 55 bps.
The gap between German and Italian debt, which investors view as a gauge of risk appetite in the wider region, also widened to nearly 140 bps, the highest since late April.
“It is clear that early elections are a new source of uncertainty, which should have some negative impact on economic and market confidence, at least in France,” said Jan von Gerich, chief market analyst at Nordea.
But he noted that EU election results are not always reflected in domestic results due to different voting systems and because EU elections tend to attract more protest votes.
However, French bank shares took a hit, with Societe Generale shares falling nearly 8% and BNP Paribas shares falling 5% as investors feared their funding costs could rise if French sovereign loans become more expensive amid rising costs. say the bankers.
Analysts also noted that a major victory for the far right in parliamentary elections could pave the way for the introduction of a tax on bank profits – another reason why shares of French lenders took such a hit on Monday.
The cost of insuring both banks’ debt against default rose to about its highest level in a month, according to S&P Global Market Intelligence.
The European Central Bank last week made its first rate cut in five years and the currency has fallen nearly 2.5% against the dollar this year, driven largely by the relative prospects for interest rate cuts in the eurozone and the United States.
In France, where concerns over the country’s high debt levels have grown this year, the impact of renewed political uncertainty on the economy may also come into focus.
Standard & Poor’s downgraded France’s sovereign debt rating last month in a painful rebuke of the government’s handling of a tight budget days before EU elections.