Key points:

  • The CAC 40 index fell to its lowest level since January.
  • The banking sector suffered the biggest losses, with BNP Paribas, Credit Agricole and Societe Generale down more than 10%.
  • The euro could fall to $1.06, its lowest level since November.

Last week, French stocks and the euro exchange rate suffered a noticeable decline. Panic in the markets was caused by a combination of factors: political uncertainty in France due to the possibility of forming a parliament dominated by far-right forces, as well as rising yields on French government bonds compared to Germany.

President Emmanuel Macron’s surprise decision to call early parliamentary elections has boosted the popularity of Marine Le Pen’s Eurosceptic National Rally party, according to opinion polls. In response, France’s left-wing parties have united in a new alliance to challenge the far right in elections.

The CAC 40 index suffered a massive fall

Investors are worried about the possible rise to power of a far-right prime minister in France. Concerns stem from his potentially “protectionist” economic policies that put French interests above all else. This could lead to a further increase in the country’s already significant public debt.

The CAC 40 index fell to its lowest level since January, losing 6% over the past week. This was the largest weekly drop in the last two years.

The decline in this sector, which is usually more sensitive to changes in the national economy, amounted to 9%. This was the biggest weekly drop since the March 2020 pandemic crisis.

The most serious blow fell on banking institutions. BNP Paribas, Credit Agricole and Societe Generale lost more than 10% of their shares over the past week, equivalent to a $19 billion decline in market capitalization since trading closed the previous Friday.

The euro may fall even further

The euro continues to fall, down 1% against the US dollar, British pound and Swiss franc over the past week alone. Compared to the pound sterling, the euro is at its lowest level in almost two years.

Markets expect further volatility. This is evidenced by a sharp rise in the volatility of monthly options on the euro against both the dollar and the pound, to the highest level in more than a year.

Opinion polls damaging the euro, as well as the possibility of more polls, are forcing investors to carefully manage their risk exposure to the currency. Analysts are predicting a possible fall in the euro to $1.06 this week, which would be its minimum since November – the rate currently stands at $1.070.

France’s five-year credit default swap rose to 38 basis points (bps) on Friday, up from 24 bps. at market close on June 7. These figures are the highest since the pandemic and, before that, the 2017 presidential election, when markets feared Marine Le Pen would win.