French stocks send Europe's STOXX 600 lower on political uncertainty

By Sruthi Shankar and Shashwat Chauhan

(Reuters) -European shares fell on Monday, with French stocks hit after President Emmanuel Macron called a snap election following a heavy trouncing of his allies in European Union parliamentary elections.

France's blue-chip CAC 40 index fell 1.4% to touch a more than three-month low, with lenders, including BNP Paribas, Societe Generale and Credit Agricole, falling by between 3.6% and 7.5%.

French bond prices also fell, pushing yields on the 10-year note to their highest level in more than six months after eurosceptic nationalists made gains in European Parliament elections on Sunday. [GVD/EUR]

Macron's unexpected decision to call an election could hand major political power to the far right after years on the sidelines, putting Marine Le Pen's National Rally (RN) party in charge of the domestic agenda, including economic policy.

"The European election results raise the possibility of RN becoming the largest group in the French parliament," economists at HSBC noted.

"If RN gains an absolute majority at the National Assembly, President Macron could be forced into a 'cohabitation' period and might have to appoint a prime minister from RN."

Shares in French motorway operators Eiffage and Vinci fell by more than 5% while airports group Aeroports de Paris and energy firm Engie shed 4.1% and 3.2%, respectively.

The pan-European STOXX 600 index fell 0.4%, with other regional markets, including Germany's DAX and Spain's IBEX down 0.4% each.

Most STOXX 600 sectors traded lower, with euro zone banks the worst hit with a 1.6% drop, while oil and gas was an outlier gaining 0.9% tracking higher crude oil prices. [O/R]

Equity markets came under pressure on Friday after a stronger-than-expected U.S. jobs report fanned worries that the Federal Reserve would not cut interest rates anytime soon.

On the other hand, the European Central Bank lowered its key rate by 25 bps from a record high to 3.75% at its policy meeting last week, but traders scaled back bets of two more rate cuts this year after it gave little hint of further moves.

ECB policymaker Peter Kazimir said in a blog post that the central bank should sit out the summer before contemplating another rate cut, while fellow policymaker Joachim Nagel likened the path for interest rates to a mountain ridge rather than a peak.

Among other stocks, UK insurer Aviva slipped 1.7% after JPMorgan downgraded the stock to "neutral" from "overweight".

(Reporting by Sruthi Shankar and Shashwat Chauhan in Bengaluru; editing by Sohini Goswami and Jason Neely)