French stocks take beating, risk premium rises under specter of possible far-right victory

French stocks plunged Friday, with the country's blue-chip index heading for its worst week in more than two years, as investors weigh a potential far-right victory in the upcoming parliamentary elections.

The CAC 40 was down 2.4% on the previous session at 2:08 p.m. London time and was set for a weekly decline of nearly 6% — its steepest since March 2022 according to LSEG data.

A volatile week kicked off in French politics, as President Emmanuel Macron called a snap election last Sunday. The president's decision came after the far-right National Rally party won a historic 31.37% of the French vote for the European Parliament, more than double the 14.6% won by Macron's own Renaissance party.

The French leader has since said he will not step down as president ifNational Rally makes significant gains in the French legislature, handing it control over economic policy and other domestic issues.

The vote outcome remains mired in uncertainty, and markets are now digesting the potential for various changes of direction in policy, as parties scramble to form alliances and push their agendas.

Banking stocks have been the most affected, with BNP Paribas and Societe Generale both tumbling this week on fears of interventionist economic policies and stronger regulation by National Rally.

"In many European jurisdictions, banks have become a soft target for populist measures such as windfall taxes and restrictions on dividends/share buybacks," Morningstar equity analyst Johann Scholtz said in a Monday note.

National Rally has also proposed significant tax cuts, further spooking markets. The party this week appeared to dial back some of its previous proposals, such as lowering the national retirement age.

Deutsche Bank strategist Jim Reid on