European Stocks Fall on Banking Weakness as Political Risk Returns
London Stock Exchange

European stock markets fell on Monday as bank stocks hit the deck in a broad-based selloff. The principal driver behind price action for the session was a return of political risk, with investors focusing increasingly on French politics and the likely outcome of a key referendum on constitutional reform in Italy.

The DAX in Germany dropped 0.9% for the session while the CAC 40 in Paris was down by some 0.7%. The FTSE 100 in London was 0.6% lower by the close and the mid-market FTSE 250 was down by 0.6%.

The euro currency fell more than 100 points against the dollar during the session, to trade back at 1.0570. The pound also fell by a similar measure against the greenback after the Prime Minister's office reiterated the government's commitment to Britain's exit from the EU, in response to speculation that a deal could be crafted that avoids an all-out exit.

Bond markets were mixed during the session. French 10-year yields rose by 10 basis points to 0.77%., pushing them close to their 2016 high. The German 10-year yield was down 20 basis points to 0.19%. U.K. 10-year yields were also down by almost 10 basis points to 1.24%.

The December referendum in Italy is a concern, given that Prime Minister Matteo Renzi has said that he will step down in the event that he fails to secure enough support for his proposed reforms. Polls show the "No" campaign with a strong lead over Renzi's reformists, giving rise to the prospect of a snap election and a populist party ascending to power in one of Europe's largest economies.

Analysts and various media outlets warned on Monday that a "No" vote could lead to bank failures, given the fragile state of Italy's financial system.

The victory Frances Fillon, a Reagan-like candidate, in the French Conservative party primary brought the 2017 election back to the fore. The U.K. has voted for Brexit and Donald Trump has been elected to the White House, and political pundits the world over have been left without words in recent weeks.

The two black-swan political events have made the prospect of a Front Nationale government in France a possibility not to be dismissed. That is unnerving for markets, given that party leader Marine Le Pen is campaigning on a platform to withdraw France from the euro currency -- and potentially the European Union.

France was a founding member of the European club, so a French exit is seen as likely to be more damaging to EU than any Brexit. Should Le Pen win and force through a French exit from the euro, then it could sound the death knell for the European Union's currency.

In individual stocks, banks were hit the hardest. In France, Credit Agricole (CRARY) , BNP Paribas (BNPQY)  and Societe Generale (SCGLY) were all among the top fallers, after losing between 1.8% and 2.2%. In Germany, Commerzbank (CRZBY) and Deutsche Bank (DB) were both in the top-five fallers.

Deutsche Lufthansa (DLAKY) , Germany's leading airline, saw its stock hit hard after pilots and workers announced yet another round of strikes. The airline was forced to cancel another 1,700 flights as a result of the action, bringing the total of canceled flights to more than 3,000 in the last two weeks. The stock was down more than 2.2% on Monday, bringing losses for the year to date to around 13%.

In London the FTSE 100 was weighed down by both retailers and banks. Retailers were weaker in response to Prime Minister Theresa May's renewed commitment to delivering a clean break from the EU, and as investors speculated that Black Friday sales may have been a wash in the U.K.

Next stock was down by 2.9% for the session, while Sky (SKYAY) , Burberry (BURBY) and Marks & Spencer (MAKSF) were all around 2% weaker.

On the FTSE 250, asset managers Aberdeen Asset Management and Man (EMG) were both top fallers. Aberdeen tipped its hat to the idea of more M&A in the sector when reporting full year results on Monday morning, saying that it would like to carry out an acquisition similar to that done by Henderson (HNDGF) and Janus (JNS) back in October.