European stocks close lower after Macron calls snap election; French CAC 40 down 1.4%

LONDON — European stocks fell on Monday as traders reacted to initial results from the EU Parliament elections and the surprise call for parliamentary elections by French President Emmanuel Macron.

Early EU election results indicate that populist, far-right parties could have a bigger hand in European policymaking over the next five years.

The pan-European Stoxx 600 index closed down 0.27%, with food and beverage stocks leading the losses, down 1.2%.

The euro slipped 0.51% against the U.S. dollar and 0.57% against the British pound.

The election drama was rounded off Sunday evening when French President Emmanuel Macron called snap parliamentary elections later this month after suffering a heavy defeat in the EU vote.

France’s CAC 40 index was down 1.4% on Monday, with French banks sharply lower following the shock news. Societe Generale and BNP Paribas shares fell 7.5% and 4.7%, respectively.

Investors are concerned about the risk of interventionist economic policies and stronger regulation from the country’s far-right National Rally party, Morningstar equity analyst Johann Scholtz said by email.

Macron’s gamble could result in significant parliamentary gains or even a majority for National Rally, political analysts said Monday, giving the party sway over domestic and economic policy.

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

The wider spread of French government bonds after the elections has hurt French banks that are large holders of sovereign bonds, he added. Wider yield spreads are generally a sign of risk aversion.

Given that the center-right held on to a majority in the European Parliament and that far-right gains had been widely forecast, it was the snap French election that “spooked the market” on Monday, strategists at Barclays said in a note.

However, “there is still a long way to go before [National Rally] get an outright majority (289 seats), and as it stands, the most likely outcome appears to be another hung parliament/coalition for Macron,” according to Barclays.

Elsewhere, investors will be looking ahead to more U.S. inflation data on Wednesday, as well as the next meeting of the U.S. Federal Reserve. Both come after a stronger-than-expected U.S. jobs report last Friday revealed hiring and wage growth picked up in May.

It adds to the narrative that the Fed is in no rush to lower interest rates. Traders don’t expect the Federal Open Market Committee to cut rates at its meeting this week or the next meeting in July.

Overnight, Asia-Pacific markets were mixed, with a few markets closed for a holiday Monday, including Australia, mainland China, Hong Kong and Taiwan.

U.S. stocks were mixed in early deals Monday after a winning week.