European stocks tumbled on Monday morning as traders reacted to initial results from the EU Parliament elections and the surprising announcement of snap parliamentary elections by French President Emmanuel Macron.
This political turmoil has increased the premium bond investors demand for French debt and widened the gap between German and Italian bonds, indicating higher regional risk.
Jan von Gerich from Nordea noted that EU election results don’t always translate into domestic outcomes, but the snap election adds a new layer of uncertainty affecting economic and market confidence in France. By 10:35 a.m. London time, the pan-European Stoxx 600 index was down 0.8%, with 1.7% of the losses coming from construction companies. The euro dropped 0.3% against the British pound and 0.4% against the US dollar.
After Macron faced a crushing defeat in the EU vote, the election drama intensified on Sunday night when he announced that early parliamentary elections would be held later this month. The French CAC 40 fell 2% as a result of the poor response from French banks. Societe Generale’s and BNP Paribas’ shares fell 7.4% and 5%, respectively.
The announcement of the snap election “spooked the market” on Monday, according to strategists at Barclays. The results of the EU election, in their words, were “a blow to Macron’s credibility and pro-EU stance.” In France, the far-right National Rally party has gained support, raising the possibility that it will pick up more legislative seats. A hung parliament or a coalition led by Macron are the most plausible scenarios, according to Barclays, with the majority of 289 MPs remaining unlikely.