European assets experienced a risk-off session following the results of the weekend's Parliamentary Elections.
The euro decreased by 0.6% against the US dollar, reaching 1.0760 by 1:10 pm CMT. This, combined with last Friday’s 0.8% drop, marked the single currency's worst two-day performance since early February 2023.
In the equity market, all European indices traded in negative territory. Paris' CAC 40 was the hardest hit, down 1.7%, on track for its worst session in nearly a year.
French stocks saw a widespread decline, particularly impacting banks like Societe Generale and BNP Paribas, down by 7% and 5% respectively. Additionally, large-cap companies such as Hermes and LVMH fell by about 2%.
Germany's DAX index fell by 0.7%, while Italy's FTSE MIB lost 0.9%. The broader European Euro Stoxx 50 declined by 1.2%, and the Euro Stoxx 600 was down by 0.6%.
Election results reveal the rise of far-right parties
Despite the current majority coalition in the European Parliament - comprising the centre-right European People's Party (EPP), the centre-left Socialists and Democrats (S&D), and the liberal Renew group - maintaining leadership, the shock came from the results in France and Germany, the two primary European powers.
In Germany, Chancellor Olaf Scholz's Social Democratic Party experienced its worst result ever, falling to third place behind the far-right Alternative for Germany. In France, President Macron has unexpectedly called a snap legislative election after his Renaissance party underperformed relative to Marine Le Pen's National Rally. The first round of legislative elections is set for 30 June, with the second round on 7 July.
In Italy, Prime Minister Giorgia Meloni's right-wing Brothers of Italy party significantly improved its standing, securing 28.8% of the vote. This is more than four times its share in the 2019 EU election and surpasses the 26% it achieved in the 2022 national election when it came to power.
While the EPP secured the most seats, bolstering Ursula von der Leyen's bid for a second term as Commission President, the rise of far-right parties in opposition poses a challenge for passing key legislation needed to address security issues, energy policies, and military alliances.
Analyst reactions
Luca Cigognini, market strategist at Intesa Sanpaolo, remarked that the significant defeats of Macron and Scholz heavily impacted the EUR/USD's performance at the opening of the European market.
He noted that the EUR/USD failed to hold the technical support of 1.0800, slipping to 1.0750. "It is possible that this move stems from an emotional reaction and is short-lived," Cigognini added, emphasising the importance of maintaining the support level of 1.0740 to avoid a broader bearish trend toward 1.0680.
Pablo Zaragoza, Head of European Macro and Rates at BBVA, indicated that, while the results of the European Elections were noteworthy, they were not entirely surprising from an aggregate perspective. The mainstream parties retained their majority in parliament, though they lost ground to far-right groups.
He pointed out that "the devil is in the 'national' detail, particularly in France." Zaragoza also suggested that the risk-off mood triggered by the election results would likely put 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, highlighted that the French elections scheduled for 30 June could weigh on the currency throughout the month.
He described the move as a gamble, questioning whether the French electorate genuinely desires a far-right government or if it is an opportunity to give the electorate three years to experience such a government 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 will probably keep the dollar in the ascendancy until we hear from the Fed Wednesday evening."
