French stocks tumbled on Friday as the prospect of a far-right government and leftwing opposition rattled European financial markets, deepening a sell-off that has wiped €150bn off Paris’s main index.
The Cac 40 has lost more than 6 per cent in the five trading sessions since Emmanuel Macron’s shock decision on Sunday to call snap parliamentary elections, in its worst weekly performance since March 2022.
On Friday alone the index tumbled 2.7 per cent, with bank shares sharply down in the wake of projections showing that a new leftwing bloc with big spending commitments and Marine Le Pen’s far-right Rassemblement National could between them virtually wipe out Macron’s centrist alliance.
The president’s hopes of striking common cause with the main parties of the centre-left and the centre-right appear to have been dashed by the new leftwing alliance and by turmoil on the traditional right.
Finance minister Bruno Le Maire warned this week that a victory by the RN, which trounced Macron’s party in EU elections last Sunday, could lead to a “debt crisis” similar to the market chaos under former UK prime minister Liz Truss.
James Athey, a fund manager at Marlborough Group, said the far-right grouping seemed unlikely to “come in with a load of fiscal responsibility” and was likely to clash with Brussels.
“Even a result which isn’t an outright RN win isn’t likely to be stable at all,” he added. “And markets hate uncertainty, instability and volatility.”
With investors unnerved by the possibility of a new populist French government with big spending plans, the region-wide Stoxx Europe 600 index also suffered its worst week since October last year, with German, Italian and Spanish indices all down.
Barclays scaled back its “overweight” recommendation for European stocks this week, advising “caution on the region for now given the political situation in France”.
As fears of political instability spread, the euro fell 1 per cent against the dollar this week to just below $1.07.
Mohit Kumar, chief economist for Europe at Jefferies, said markets were concerned about issues ranging from “stalling of the reform process, possible rating downgrades, to increasing concerns over talk of a break-up in the euro area”.
The spread between benchmark French and German yields — a market barometer for the risk of holding France’s debt — rose to as much as 0.82 percentage points on Friday, the highest level since 2017.
Banks — which would be exposed to slowing economic growth and also hold substantial government debt — have been among the worst-performing French stocks. Crédit Agricole, BNP Paribas and Société Générale have this week dropped 11 per cent, 12 per cent and 15 per cent, respectively.
“When the Americans wake up, they’re selling Europe and especially France, which is the weakest link right now,” said John Plassard, senior asset specialist at Mirabaud Group in Switzerland.
New projections by French media have highlighted the challenges facing Macron in the two-round contest on June 30 and July 7.
The forecasts, based on the European parliament results, suggest that only about 40 of Macron’s MPs might qualify for the second round of contests for the 577 member National Assembly, together with a handful from the centre right.
While some pollsters question the survey’s methods, more traditional polling also suggests the vast majority of new MPs will favour huge spending commitments.
Citing economy ministry figures, Macron’s campaign has said RN’s policy of cutting valued added tax on energy, fuel and food alone would cost €24bn a year.
Four leftwing parties that have formed a common front for the election also announced unfunded spending pledges worth tens of billions of euros on Friday.
The left’s uncosted programme would scrap Macron’s planned increase in the pension age to 64 and freeze the prices of food and energy.
“We will finance this programme by dipping into the pockets who can most afford it,” said Olivier Faure, socialist party leader, referring to plans to hike income taxes for the well-paid and reintroduce a wealth tax.
The left’s programme also “rejects” EU budgetary rules, which require a deficit of less than 3 per cent of GDP.
This article has been amended to correct the value lost by the French market
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