(Bloomberg) -- French stocks are on the verge of a 10% correction from their May record, weighed down by disappointing earnings from heavyweights such as Kering SA as well as political turmoil that has investors fretting about the state of the nation’s finances.
The CAC 40 Index dropped 2.0% to 7,362.68 points at 12:17 p.m. Thursday in Paris. If the index closes at 7,415.99 or lower, it will be in a correction, defined as a decline of 10% from a recent high.
The benchmark peaked at 8,239.99 on May 15, three and a half weeks before President Emmanuel Macron roiled financial markets by calling a snap election. No party won a majority in the voting that concluded July 7, leaving the country with a hung parliament. Political parties now are jockeying for the right to form a government.
“The first wave that hit the CAC 40 came from the elections, which raised the risk premium for French stocks,” said Amelie Derambure, senior multi-asset portfolio manager at Amundi in Paris. “Now, the second wave is the luxury sector, a typical French investor darling, but which is suffering this earnings season with a notable erosion of pricing power.”
Earnings reports this week have indeed proved a disappointment. LVMH, the world’s biggest luxury company and the mightiest constituent of the Paris bourse, sank on Wednesday. Shares of luxury-goods company Kering SA, automaker Stellantis NV and chipmaker STMicroelectronics NV all plunged 10% on Thursday after they announced results.
On the political front, Macron has said he won’t name a new prime minister until mid-August, after the Olympics that kick off this week in Paris. Investors are concerned a new government might ramp up public spending, exacerbating conflict with the European Union over France’s budget deficit and exposing the country’s debt rating to further downgrades.
The left-wing alliance, New Popular Front — which includes the Socialists, the Greens and the far-left France Unbowed — is the biggest bloc in the 577-seat National Assembly, but is about 100 lawmakers short of a majority.
After Macron called the election, the yield premium that investors demand to hold France’s 10-year bonds over safer German securities soared to its highest levels since the sovereign debt crisis. More than $200 billion has been wiped off the market value of French stocks.
The CAC 40 is down 2.4% on the year, underperforming every other major European market. By contrast, the pan-European Stoxx Europe 600 Index is up 5.3%.
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