LONDON (Reuters) - European stock indexes dropped on Friday as French assets took a battering from political turmoil, and the cautious mood looked set to continue on Wall Street as investors weighed up the U.S. rates outlook after a week of mixed signals.
President Emmanuel Macron's grip on power weakened after European Parliament elections last weekend. He called a snap election on Sunday, leaving market participants worried that the far right, led by Marine Le Pen's Rassemblement National (RN), could win and push a high-spending agenda.
France's finance minister said the country faces the risk of a financial crisis if the far right were to win.
The risk premium on French government bonds surged to its highest since 2017, and the spread between French and German 10-year government bond yields was at 81.5 basis points.
"It is justified that some political risk is priced into French assets. Markets are weighing the risks of an RN government, assuming more fiscal slippage, nationalization risks, etc," said Amelie Derambure, Senior Multi-Asset Portfolio Manager at Amundi in Paris.
But Derambure added that the risks are "very different from 2017" because the RN is not talking about taking France out of the European Union.
"That is a major difference," she said.
The euro was down 0.4% on the day at $1.068725, having earlier hit its lowest in more than six weeks. Analysts said the move was due to the risk premium on European markets, following gains by far-right parties in various countries.
World stocks were down 0.2% on the day, having fallen since they hit an all-time high earlier in the week.
Wall Street futures were down, as investors focused on the outlook for US rate cuts. S&P 500 futures were down 0.5% while Nasdaq futures were down 0.3%.
WATCHING THE DATA
The US Federal Reserve on Wednesday pushed back the expected start date for its rate cuts. Fed Chair Jerome Powell said policymakers were content to leave rates where they are until the economy sends a clear signal that something else is needed.
But investors took some confidence from cooler-than-expected producer prices and consumer price data.
Weekly jobless claims in the US hit a 10-month high as the labour market cooled.
"The last mile on the disinflation process will likely require some weaker growth and weaker demand ... the numbers that we have seen this week are going into that direction," said Amundi's Derambure.
The US dollar gained, with the dollar index up 0.2% at 105.53, on track for a 0.6% weekly rise.
Elsewhere, the yen fell after the Bank of Japan said it would begin trimming its huge bond purchases in the future, in a move interpreted as signaling it was not in a hurry to do so soon.
The dollar gained as much as 0.8% to 158.255 on the yen, causing the yen to touch its weakest in more than a month during Asian trading, though it recovered in early European trading.
US Treasury yields were down, with the benchmark 10-year yield down 4 basis points at 4.1996%.
Eurozone government bonds were also down. Germany's 10-year yield was at 2.353%, down 13.8 basis points on the day.
Oil prices eased, but crude benchmarks were still on track for their best week in more than two months.
Gold was up 1.4% on the day at $2,334.23.