by Diana Mandia

(Reuters) – European stock markets ended lower on Tuesday amid political uncertainty in France, with negotiations to form a new government proving complex after the left-wing alliance won a second round of parliamentary elections without an absolute majority.

In Paris, the CAC 40 lost 1.56% to 7,508.66 points. In Frankfurt, the Dax fell by 1.34% and in London, the FTSE 100 dropped 0.66%.

The EuroStoxx 50 index ended down 1.44%, the FTSEurofirst 300 down 0.90% and the Stoxx 600 down 0.99%.

Uncertainty over the political future of the eurozone’s second-largest economy continues to weigh on European indices, notably the CAC 40 and French banks, as negotiations have not yet clarified the structure of the next French government, with an Assembly divided into three large blocs without an absolute majority.

The left-wing alliance promises to nominate a candidate in the coming days, but uncertainty remains over the method and the balance of power within the group, while the presidential camp says it is ready to discuss with all members of the “republican arc”, excluding the National Rally (RN) and LFI.

According to Moody’s, this fragmentation is negative for the country’s credit rating, and the lack of an absolute majority in the new National Assembly risks making decision-making and controlling public debt more difficult, a finding similar to that issued by S&P on Monday.

“We have to see how the rating agencies will judge France in the coming months, recalling that (its) ‘AA’ status is in danger, in our opinion,” said Mauro Valle, head of fixed income at Generali Asset Management.

In the United States, Federal Reserve Chairman Jerome Powell suggested to US senators on Tuesday that the case for lowering interest rates was increasingly compelling, although the lack of a clear timetable disappointed investors somewhat, sending the dollar and bond yields higher.

“The market is counting down the days until we get a rate cut signal from Federal Reserve Chair Powell and I think some in the market were expecting a more concrete step towards rate cuts later this year,” said Adam Button, chief currency analyst at ForexLive.

VALUES

In terms of values, Dassault Systèmes, which reported a shortfall in its second quarter revenue on Tuesday and revised its annual targets downwards, lost 5.1%, the biggest drop in the CAC 40.

French banking stocks, including BNP Paribas, Société Générale and Crédit Agricole, continued to decline amid political uncertainty and ended in the red.

The glass group Verallia, for its part, fell by more than 18% after announcing the lowering of its adjusted EBITDA forecast for 2024.

Artificial heart manufacturer Carmat, which announced half-yearly sales of 3.2 million euros on Tuesday, ended with a gain of 5.3%.

Elsewhere in Europe, British major BP fell 4.3% after saying it expected lower realized refining margins and weak oil trading to negatively impact its second-quarter financial results.

A WALL STREET

At the time of the European closing, the Dow Jones lost 0.12%, the Standard & Poor’s 500 gained 0.20% and the Nasdaq Composite gained 0.25%, the latter two having reached new historical records on Tuesday, driven by semiconductors and technology.

CHANGES

On the foreign exchange market, the dollar gained 0.17% against a basket of reference currencies, while the Fed chairman did not give a clear timetable for lowering interest rates.

The euro lost 0.12% to 1.0808 dollars, affected by political turbulence in France.

RATE

Bond yields rose Tuesday amid political uncertainty in France and as the Fed chairman said more positive inflation data would strengthen the case for a rate cut, without giving a specific timeline.

The yield on the ten-year German Bund rose almost 4 basis points to 2.5580% while the two-year Bund gained almost 2 to 2.9270%.

In France, uncertainties over the political situation are putting pressure on the yield of the ten-year OAT, which has risen by almost 9 basis points to 3.2580%.

The “spread” or yield gap between long-term French and German bonds widened to 69 basis points on Tuesday.

In the United States, the yield on ten-year Treasuries rose by 5.6 basis points to 4.3252% and the two-year rate rose by 3.4 basis points to 4.6515% after Jerome Powell’s speech.

OIL

Crude prices fell Tuesday as Hurricane Beryl caused less damage than expected to oil facilities in the Gulf of Mexico, easing fears of supply disruptions.

Brent fell 0.68% to $85.17 per barrel and US light crude (West Texas Intermediate, WTI) fell 0.62% to $81.82.

(Written by Diana Mandiá, edited by Blandine Hénault)

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