European stocks slide as French election, rate nerves persist

By Sruthi Shankar and Jesus Calero

(Reuters) -European stocks fell to two-week lows on Tuesday as the relief rally in French shares following the first round of parliamentary elections faded, while data pointed to elevated services inflation in the euro zone.

The pan-European STOXX 600 index ended 0.4% lower, off near two-month lows hit earlier in the session.

Insurers dropped 1.6% to lead sectoral declines, led by a 5.2% fall in Beazley as hurricane Beryl in South Caribbean intensified.

France's blue-chip CAC 40 index slid 0.3% as investors remained cautious ahead of a second-round vote on July 7.

European shares finished 0.3% higher on Monday, helped by a 1.1% jump in the battered French market after Marine Le Pen's National Rally party scored a smaller win than some polls had expected, lowering the chance of an absolute majority for the far-right party.

"Both potential outcomes of this election, whether a far-right or a far-left coalition, don't give political stability," said Daniela Hathorn, senior market analyst at Capital.com.

Meanwhile, data showed euro zone inflation eased last month but a crucial services component remained stubbornly high, likely fuelling concern among some European Central Bank policymakers that price pressures could remain elevated.

"The fact that services inflation, which is most sensitive to domestic economic conditions, has remained high this year strengthens the case for caution at the ECB," said Jack Allen-Reynolds, euro-zone economist at Capital Economics.

ECB President Christine Lagarde, however, welcomed a small fall in inflation last month as a step in the right direction.

Traders are pricing in a 50% chance of a 25 basis point rate cut in September and an even lower chance of another cut in December, as per LSEG data.

Auto stocks shed 0.9%, dragged down by a 3.1% fall in Michelin after analysts flagged the French tyre maker's lower full-year volume expectations during a pre-close call.

Among other stocks, Novo Nordisk slipped 1.1% after a report said U.S. President Joe Biden had called on the Danish drugmaker to reduce the prices of their weight loss and diabetes drugs.

Sodexo dropped 4.7% after the French food caterer posted third-quarter sales below expectations, citing a slowdown in China.

Germany's HelloFresh jumped 7.7% after J.P.Morgan removed the food delivery company from its negative catalyst watch.

(Reporting by Sruthi Shankar and Shristi Achar A in Bengaluru and Jesus Calero in Gdansk; Editing by Rashmi Aich, Sonia Cheema, Savio D'Souza and Christina Fincher)