European Assets Face Risk-Off Session Post-Weekend's Parliamentary Elections

European assets experienced a significant risk-off session following the weekend's parliamentary elections, reflecting investor concerns over the political landscape. The euro suffered its worst two-day performance against the US dollar since February 2023, exacerbating the overall negative sentiment in European markets.

By 1:10 p.m. CMT, the euro had declined by 0.6% against the US dollar, trading at 1.0760. This followed a 0.8% drop last Friday, marking a two-day slump unparalleled in recent months.

Euro Slumps Amid Political Turmoil

Political uncertainties stemming from the election results in key European countries spurred the euro's decline. French President Emmanuel Macron's call for a snap legislative election and the rise of far-right parties in Germany and France added to market jitters.

In France, Macron's Renaissance party underperformed, while Marine Le Pen's National Rally gained ground, promptingMacron to call for legislative elections. Macron has scheduled the first round for June 30 and the second for July 7.

Germany's results were equally unsettling, with Chancellor Olaf Scholz's Social Democratic Party recording its worst-ever result, falling behind the far-right Alternative for Germany.

European Indices in Negative Territory

All major European indices were in the red, with Paris' CAC 40 suffering the most, down 1.7% and heading for its worst session in nearly a year. French stocks, especially those in the banking sector, suffered significant losses. Societe Generale and BNP Paribas fell by 7% and 5%, respectively, while luxury giants Hermes and LVMH saw declines of around 2%.

Germany's DAX index dropped by 0.7%, Italy's FTSE MIB fell by 0.9%, and the broader Euro Stoxx 50 and Euro Stoxx 600 indices declined by 1.2% and 0.6%, respectively.

Rise of Far-Right Parties

The election results highlighted the growing influence of far-right parties across Europe, posing challenges for the existing majority coalition in the European Parliament. Despite the centre-right European People's Party (EPP), the centre-left Socialists and Democrats (S&D), and the liberal Renew group maintaining leadership, the rise of far-right factions in France and Germany signalled a shift in the political landscape.

In Italy, Prime Minister Giorgia Meloni's right-wing Brothers of Italy party significantly increased its vote share, securing 28.8%. This bolstered Meloni's position as a key figure in European politics.

Analyst Insights

Market strategist Luca Cigognini of Intesa Sanpaolo noted the heavy impact of Macron and Scholz's defeats on the EUR/USD's performance at the European market's opening. The EUR/USD failed to maintain the technical support level 1.0800, falling to 1.0750. Cigognini suggested that this decline might be an emotional reaction and could be short-lived, emphasising the need to hold the support level at 1.0740 to avoid a broader bearish trend towards 1.0680.

Pablo Zaragoza, Head of European Macro and Rates at BBVA, remarked that while the election results were significant, they were not entirely unexpected. He highlighted the importance of national details, particularly in France, in understanding the broader political shifts. Zaragoza also suggested that the risk-off mood would likely exert pressure on real yields, especially in France and Italy, while countries like Portugal and Spain might continue to outperform.

Chris Turner, Global Head of Markets at ING, warned that the upcoming French elections on June 30 could weigh on the euro throughout the month. He described Macron's decision as a gamble, questioning whether the electorate genuinely desires a far-right government or if this is a strategic move ahead of the 2027 presidential election.

Turner also noted that the risks of another uncomfortable 0.3% month-on-month US core CPI print on Wednesday could keep the dollar in a dominant position until the Federal Reserve's announcement on Wednesday evening.

Conclusion

The weekend's parliamentary elections have significantly impacted European markets, with the euro and major indices all experiencing declines. The rise of far-right parties in key European countries adds a layer of uncertainty to the political and economic landscape, prompting cautious sentiment among investors. Investors will closely watch the upcoming French elections and US economic indicators as the market reacts to these developments.