European stock markets fell sharply on Tuesday morning, with French shares leading the decline amid growing political uncertainty in Paris. Investors reacted nervously to the prospect of a no-confidence vote against Prime Minister François Bayrou’s government next month.
France’s CAC 40 dropped more than 2% initially before easing back to a 1.75% loss. The key opposition parties announced they would not support Bayrou’s surprise confidence vote set for September 8, centred on his austerity budget plans.
The government is proposing €44 billion in spending cuts, including freezes on welfare, pensions, and tax brackets, aimed at reducing the country’s 5.8% GDP deficit. These measures have sparked strong political opposition, especially over cuts to public holidays.
Erik Nelson, head of G10 FX strategy at Wells Fargo, described the outlook for French assets as “not great,” though he noted the situation remains uncertain. He said, “They’re walking a very fine line here, and given where market positioning is in European assets, there’s a lot of risks.”
Broader European markets also weakened, with the UK’s FTSE 100 and Germany’s DAX falling about 0.5%. Investor nerves were further shaken by U.S. President Donald Trump’s announcement that he had fired Federal Reserve Board Governor Lisa Cook.
Cook rejected his authority to remove her, indicating a possible legal challenge, and reigniting concerns over Fed independence amid Trump’s longstanding criticisms of Chairman Jerome Powell.
Last week’s rally, fuelled by expectations of a September rate cut following Powell’s speech, has been tempered by this fresh turmoil.
Meanwhile, German sportswear firm Puma’s shares slid 1.75% after an earlier 16% jump, triggered by reports that its major shareholder, the Pinault family, might consider selling the company.
The economic calendar features French consumer confidence data on Tuesday and inflation reports across Europe on Friday. U.S. tech giant Nvidia will release its earnings on Wednesday, an important signal for global markets.
With political tensions mounting and upcoming economic data in focus, markets face a challenging, uncertain period ahead.