French stocks tumble, risk premium rises under spectre of far-right

French stocks plunged on Friday, with the country’s blue-chip index heading for its worst week in more than two years, as investors weigh a potential far-right victory in the upcoming parliamentary elections.

The CAC 40 was down 2.4% on the previous session at 2:08 p.m. London time and was set for a weekly decline of nearly 6% — its steepest since March 2022 according to LSEG data.

A volatile week kicked off in French politics, as President Emmanuel Macron called a snap election last Sunday. The president’s decision came after the far-right National Rally party won a historic 31.37% of the French vote for the European Parliament, more than double the 14.6% won by Macron’s own Renaissance party.

The French leader has since said that he will not step down as president if National Rally makes significant gains in the French legislature, handing them control over economic policy and other domestic issues.

The vote outcome remains mired in uncertainty, and markets are now digesting the potential for various changes of direction in policy, as parties scramble to form alliances and push their agendas.

Banking stocks have been the most affected, with BNP Paribas and Societe Generale both tumbling this week on fears of interventionist economic policies and stronger regulation by National Rally.

“In many European jurisdictions, banks have become a soft target for populist measures such as windfall taxes and restrictions on dividends/share buybacks,” Morningstar equity analyst Johann Scholtz said in a Monday note.

National Rally has also proposed significant tax cuts, further spooking markets. The party this week appeared to dial back some of its previous proposals, such as lowering the national retirement age.

Deutsche Bank strategist Jim Reid on Friday noted the piling risk premium on French 10-year bond yields, and the yawning spread between them and German 10-year bond yields, which was up more than 21 basis points this week.

“Even if it’s unchanged today, that would be the biggest weekly jump in the spread since the height of the sovereign debt crisis in late-2011,” Reid said.

“To be honest, it’s hard to ignore the parallels between our current situation and the time of the sovereign debt crisis, as there’s that familiar focus on election results, sovereign bond spreads and debt sustainability, coupled with no obvious sign about where things are headed next.”

Economists at Berenberg meanwhile said in a Friday note that likely heavy losses for Macron’s centrists in the parliamentary elections will almost certainly spell the end of pro-growth reforms.

The outcome could be a hung parliament, which does not make much further progress but does not reverse Macron’s agenda, the analysts signaled — or a narrow National Rally victory in which former party leader and star name Marine Le Pen focuses on her “main goal” of winning the 2027 presidential election.

“She might still choose to not rock the boat too badly, concentrating on some signature policies (eg being tough on immigration) rather than on expensive or disruptive promises,” the Berenberg economists said.

However, they flagged an alternative “serious risk” scenario, in which Le Pen “calls the shots in parliament and pursues major parts of her expensive fiscal and protectionist ‘France first’ agenda.”

“The result could be a Liz Truss-style financial crisis,” they said, referring to the U.K.’s short-serving prime minister who sparked severe market volatility in 2022 with a raft of unfunded tax cuts.