June 10 (Reuters) - European stocks dropped on Monday after French President Emmanuel Macron called a snap election following a heavy loss in the European Union vote to the far-right, rattling investors already worried about the interest rate outlook.
France's blue-chip CAC 40 index (.FCHI), opens new tab dropped 1.8% to touch a more than three-month low, with lenders, including BNP Paribas (BNPP.PA), opens new tab, Societe Generale (SOGN.PA), opens new tab and Credit Agricole (CAGR.PA), opens new tab, falling in the range of 4.3% and 7%.
The CAC 40 looked on course for its biggest percentage daily drop since July 2023.
French bond prices also fell , pushing yields to their highest in two weeks, after Eurosceptic nationalists made gains in European Parliament elections on Sunday, prompting a bruised Macron to call a snap national election.
"What we've seen before when there were other kinds of political gambles, not least for the Brexit referendum in the UK, is that you never necessarily could be sure which way the electorate will sway," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
Given that there have been shocks in the past, there are some concerns that this gamble may not pay off for Macron, Streeter said.
Macron called a parliamentary election with the first round on June 30. If the far-right National Rally party wins a majority, Macron would be left without a say in domestic affairs.
The pan-European STOXX 600 index (.STOXX), opens new tab fell 0.6%, with other regional markets, including Germany's DAX (.GDAXI), opens new tab and Spain's IBEX (.IBEX), opens new tab down 0.7% and 0.6%, respectively.
Equity markets came under pressure on Friday after a stronger-than-expected U.S. jobs report fanned worries that the Federal Reserve would not cut interest rates anytime soon.
Traders are currently pricing in rate cuts of 37 basis points (bps) from the Fed by the end of this year, as per LSEG's rate probabilities tool, with a 45% chance of a first cut in November.
The European Central Bank lowered its key rate by 25 bps from a record high to 3.75% at its policy meeting last week, but traders scaled back bets of two more rate cuts this year after it gave little hint of further moves.
ECB policymaker Peter Kazimir said in a blog post that the central bank should sit out the summer before contemplating another rate cut as inflation is far from defeated and price pressures could resurface.
Among single stocks, UK insurer Aviva (AV.L), opens new tab slid 1.5% after JPMorgan downgraded the stock to "neutral" from "overweight".
Finnish chemicals company Kemira(KEMIRA.HE), opens new tab climbed 4% after it raised its full-year earnings outlook, pointing to continued recovery in end markets.
Reporting by Sruthi Shankar in Bengaluru; Editing by Subhranshu Sahu and Sohini Goswami
