European shares fall on French election uncertainty; log weekly gain

By Shristi Achar A, Sruthi Shankar and Jesus Calero

(Reuters) -European shares fell on Friday, weighed down by losses in banks and energy stocks as investors became more cautious ahead of the second round of voting in French parliamentary elections.

The pan-European STOXX 600 index ended 0.2% lower, after notching a more than one-week high early in the day. The index, however, clocked a 1% gain for the week.

French financial markets have come under selling pressure since President Emmanuel Macron called for a snap election last month, with concerns that a far-right win could add to worries over fiscal sustainability. But there is also nervousness about what will happen if there is no clear winner in Sunday's second round of voting.

Fresh polls showed the far-right National Rally (RN) party and its allies were still in the lead but looked to fall short of getting an outright majority.

"There's a belief that if (no) party is in full control of everything, that means only the really important stuff gets done," said Steve Sosnick, chief market analyst at Interactive Brokers.

"The quick interpretation of this (poll) is such that you may actually be moving away from gridlock in France into a more unknown situation and that can get investors a bit nervous."

French stocks fell 0.3% on Friday, but logged their biggest weekly gain since early May.

Banking stocks dropped 0.9%, among the biggest weights on the benchmark index, while energy shares fell almost 1%, leading sectoral declines.

The UK's domestically oriented FTSE 250 jumped nearly 0.9% to end at a month high after the Labour Party surged to a landslide victory on Friday, ending 14 years of often tumultuous Conservative government. The blue-chip FTSE 100, however, fell 0.4%.

"No matter what the political or policy outcome will be, after all the chaos we had with the Tories over the last couple of years, markets are for now taking the Labour Party's return to power as a positive for the British economy," said Carsten Brzeski, economist at ING.

Cushioning sentiment, data showed U.S. job growth slowed to a healthy pace in June, with the unemployment rate rising to 4.1%, increasing the chances that the Federal Reserve will be able to tame inflation without tipping the economy into recession.

Traders are pricing in a over 70% chance of a 25 basis points of a Fed rate cut in September, as per LSEG data, and 50% odds of another cut in December.

Among European stocks, German chip systems manufacturer Aixtron rallied 17.8% to the top of STOXX 600 as its strong order intake for the second quarter overshadowed cuts to its full-year forecast.

(Reporting by Sruthi Shankar and Shristi Achar A in Bengaluru and Jesus Calero in Gdansk; Editing by Sonia Cheema, Mrigank Dhaniwala and Susan Fenton)