Anxiety Over France Deepens European Stock Rout: Markets Wrap

(Bloomberg) -- European stocks headed for their worst week since October on growing concerns about political turmoil in France. US equity futures dropped as traders sought out havens.

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The Stoxx 600 weakened 0.8% to extend losses since Monday to 2.2%. France’s CAC 40 index erased this years gains, with banking shares such as BNP Paribas SA and Societe Generale SA among the biggest losers. The euro fell to its lowest against the dollar since April.

The S&P 500 and Nasdaq 100 are set to open lower after notching up record highs every day this week. A gauge of the dollar rose against major global currencies, while Treasury yields declined four basis points.

European markets are increasingly anxious after French President Emmanuel Macron announced a snap legislative election following his party’s drubbing in the European Parliament elections. Investors fear a win for Marine Le Pen’s far-right National Rally party, which leads polls by a wide margin, will usher in looser fiscal policies.

The uncertainty has sent the premium France pays on its debt relative to Germany soaring this week, on pace for the biggest move stretching back to the European debt crisis in 2011.

“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,” said Jim Reid, an analyst at Deutsche Bank AG. That’s “coupled with no obvious sign about where things are headed next.”

The week’s turmoil has wiped out all of this month’s gains for the regional benchmark, with investors warning that the volatility may continue until the French vote is concluded in July.

“Elections in France tend to be more volatile for equity markets than other developed markets,” Beata Manthey, head of European equity strategy at Citigroup Inc., told Bloomberg Television. This volatility could continue for a bit longer.”

Still, the current weakness doesn’t change the underlying strengthening in European earnings and the broader economy, she said.

In Asia, MSCI’s Asia Pacific index slipped as losses in Australian and Chinese stocks offset gains in Japan’s benchmark.

The Bank of Japan triggered renewed weakness in the yen after making investors wait until its July meeting for details on its paring of bond buying, a move that was also seen as a delay in the normalization in policy. Still, Governor Kazuo Ueda pushed back against the view that a rate hike was no longer possible next month.

A “weak yen might weight down the flows from overseas investors in the summer,” said Hiromi Ishihara, head of equity investment at Amundi Japan. “That said, we still believe that BOJ is set to move a further hike this year.”

Key events this week:

• Chicago Fed President Austan Goolsbee speaks, Friday

• US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.8% as of 10:55 a.m. London time

• S&P 500 futures fell 0.4%

• Nasdaq 100 futures fell 0.2%

• Futures on the Dow Jones Industrial Average fell 0.7%

• The MSCI Asia Pacific Index was little changed

• The MSCI Emerging Markets Index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.3%

• The euro fell 0.5% to $1.0687

• The Japanese yen was little changed at 157.12 per dollar

• The offshore yuan was little changed at 7.2730 per dollar

• The British pound fell 0.4% to $1.2706

Cryptocurrencies

• Bitcoin rose 0.3% to $66,905.3

• Ether rose 1% to $3,512.31

Bonds

• The yield on 10-year Treasuries declined four basis points to 4.21%

• Germany’s 10-year yield declined 10 basis points to 2.37%

• Britain’s 10-year yield declined eight basis points to 4.05%

Commodities

• Brent crude was little changed

• Spot gold rose 0.7% to $2,321.33 an ounce

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Winnie Hsu and James Hirai.

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