By Shristi Achar A, Sruthi Shankar and Jesus Calero
(Reuters) – European stocks fell on Friday, weighed down by losses in banks and energy stocks, as investors turned more cautious ahead of the second round of French parliamentary elections.
The pan-European index closed down 0.2%, after hitting a more than one-week high earlier in the session. However, the index posted a gain of 1% for the week.
French financial markets have been under selling pressure since President Emmanuel Macron called a snap election last month, with fears that a far-right victory could heighten concerns about fiscal sustainability. But there are also nervousness about what will happen if there is no clear winner in Sunday's runoff vote.
New polls showed the far-right National Rally (RN) party and its allies still in the lead but appeared far from securing an outright majority.
“There's a belief that if no one party has complete control over everything, that means only the really important things get done,” said Steve Sosnick, chief market analyst at Interactive Brokers (NASDAQ:).
“The quick interpretation of this (survey) is that we might actually be moving away from the stagnation situation in France towards a more unfamiliar situation and that may make investors a little bit nervous.”
French stocks fell 0.3% on Friday, but posted their biggest weekly gain since early May.
Banking stocks fell 0.9%, among the largest in the benchmark index, while energy stocks fell nearly 1%, leading sector declines.
Domestically-oriented British stocks rose nearly 0.9% to close at their highest level in a month after the Labour Party won a landslide victory on Friday, ending 14 years of often-tumultuous Conservative rule. Blue-chip stocks, however, fell 0.4%.
“Regardless of the political or policy outcome, after all the chaos we had with the Conservatives over the past few years, markets are for now taking the return of the Labour Party to power as a positive for the British economy,” said Carsten Brzeski, an economist at ING.
A relief to sentiment was data showing U.S. job growth slowed to a healthy pace in June, with the unemployment rate rising to 4.1%, raising the chances that the Federal Reserve can tame inflation without tipping the economy into recession.
Traders are pricing in a more than 70% chance of a 25 basis point Fed rate cut in September, according to LSEG data, and a 50% chance of another cut in December.
Among European stocks, German chip system maker Aixtron rose 17.8% to top the STOXX 600 as its strong second-quarter order intake overshadowed cuts to its full-year outlook.
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