European Stocks Drop Amid French Political Turmoil
The Stoxx 600 index experienced a 0.9% drop, extending losses to 2.3% since Monday, while France's CAC 40 index erased its gains for the year. Meanwhile, the S&P 500 and Nasdaq 100 were poised to open lower after hitting record highs throughout the week.
Dollar Strengthens, Treasury Yields Decline
A gauge of the dollar strengthened by 0.3%, while 10-year Treasury yields declined by five basis points, indicating a risk-off sentiment in the markets.
Concerns Over French Political Turmoil
Mohit Kumar, chief economist for Europe at Jefferies International, voiced concerns regarding France's political landscape, especially in anticipation of the impromptu legislative election declared by President Emmanuel Macron. Investors fear potential looser fiscal policies under a National Rally Party win, as polls indicate a wide margin lead for Marine Le Pen's far-right party.
Uncertainty sparks market volatility
A coalition of French left-wing parties presenting a manifesto against Macron's economic reforms added to market uncertainty. The premium France pays on its bonds relative to Germany surged, while German two-year debt yields experienced the most significant drop since May 2023.
Echoes of Past Turmoil
Analysts drew parallels between the current situation and the sovereign debt crisis, emphasizing concerns over election results, sovereign bond spreads, and debt sustainability. Jim Reid from Deutsche Bank AG noted the lack of clarity regarding future developments.
Volatility Expected Until French Vote
Investors warned that volatility may persist until the conclusion of the French vote next month. Beata Manthey, head of European equity strategy at Citigroup Inc., highlighted the historical volatility of French elections and cautioned that it could continue for a while longer.
