European stocks drop as elections in focus

Europe's broad Stoxx 600 share index declined 0.5% and France's CAC40 slipped 0.65%, unable to hold onto its gains from the day before

European stocks dropped on Tuesday, reversing some of the previous day's relief rally, while the U.S. dollar reached a near 38-year high versus the Japanese yen as the possibility of a second Donald Trump presidency left Treasury yields higher.

Europe's broad Stoxx 600 share index declined 0.5% and France's CAC40 slipped 0.65%, unable to hold onto its gains from the day before. Most other European national indexes, including in Britain, Germany Italy and Spain, were also in the red.

The French blue chip benchmark gained 1% on Monday as the first round of voting in the country's parliamentary election suggested the most likely eventual outcome would be legislative gridlock rather than a majority for the far right or left.

The premium that investors require to hold French debt over German also narrowed after the result and was last at 75 bps, though investors remain wary ahead of a second and final round of voting this coming Sunday.

Tuesday's focus is on whether opponents of France's far right can build a united front to hinder its path to victory.

Elections are also very much on investors' minds when it comes to U.S. assets, with Treasury yields remaining higher and supportive of the dollar.

It certainly looks to us to be investors increasingly trading on the prospect of a Trump victory. More fiscal stimulus and trade tariffs is inflationary and could be putting upside pressure on longer-term yields, according to Derek Halpenny head of research, global markets EMEA at MUFG.

The Constitutional Court decision yesterday that a president is immune from prosecution when carrying out his/her "official" duties is another development that will increase expectations of a Trump victory on 5th November, he said.

The benchmark 10-year Treasury yield was last at 4.45%, down 3 bps on the day, but in sight of the previous day's one-month high of 4.49%, and up nearly 20 bps in less than a week.

Germany's 10-year yield was last at 2.59%, near the previous day's two-week high, and also having risen as investors unwound some of their flight to haven assets after the French election.