Written by Dara Ranasinghe and Amanda Cooper
LONDON/SINGAPORE (Reuters) – The euro fell broadly, while French bonds and stocks were hit hard on Monday, following French President Emmanuel Macron's decision to call early parliamentary elections after his defeat in a pro-EU vote at the hands of the far right.
The euro fell 0.5 percent in early European trading to its lowest level in a month at $1.0764 and fell to its lowest level in 21 months against the pound sterling at 84.53 pence.
French bond prices fell, pushing yields to their highest levels in two weeks, around 3.17%, while blue chips in Paris fell 2%, led by sharp losses in banks such as BNP Paribas (OTC:) and Société Générale (OTC). :).
The European index fell by 0.7%. The centre, liberal and socialist parties were set to retain their majority after the European Parliament elections, but Eurosceptic nationalists made the biggest gains, raising questions about the ability of major powers to drive politics in the bloc.
In a risky gamble to restore power, Macron called for parliamentary elections with the first round on June 30.
If the far-right National Rally party wins the majority, Macron will have no role in internal affairs.
“This is probably quite bad news for markets,” said Holger Schmieding, chief economist at Berenberg.
“It introduces an unexpected element of uncertainty.”
Britain holds a general election on July 4, and a crucial US election in November, while markets have become fragile recently as expectations of US interest rate cuts dwindle.
The “shock factor” caused by Macron's decision to call a snap election will weigh on European markets on Monday, but who emerges victorious in the actual vote may carry more weight, Kathleen Brooks, research director at trading platform XTB, said in a note.
“The question for traders in the euro 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.
Wake-up cry?
While euro and eurozone assets have been largely cushioned by declining euroscepticism compared to the elections of the 2000s and early 2010s, the results and the surprising reaction from France could serve as a wake-up call. .
Premium bonds, required by investors to hold French government debt, rather than benchmark German bonds, touched a six-week high, expanding by 5 basis points to 53.47 basis points.
The gap between German and Italian debt, which investors consider a measure of risk appetite in the broader region, also widened to 137 basis points.
“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 Gerisch, chief market analyst at Nordea.
But he pointed out that EU election results do not always translate into local results, due to different voting systems and because EU elections tend to attract larger protest votes.
It would take a massive surge on the far right for the euro to weaken significantly, said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
The European Central Bank last week made its first interest rate cut in five years, and the currency has fallen about 2.5% against the dollar this year, driven mostly by relative expectations of interest rate cuts in the euro zone and the United States.
In France, where concerns about the country's high debt levels have grown this year, the ramifications of renewed political uncertainty on the economy could also come into focus.
Standard & Poor's last month downgraded France's sovereign debt, a painful rebuke of the government's handling of a tense budget days before EU elections.
