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French stocks at three-month lows

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Fed policy outcome due later this week

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Aviva dips after JPM downgrade

(Updated at 0848 GMT)

By Sruthi Shankar

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 dropped 1.8% to

touch a more than three-month low, with lenders, including BNP

Paribas, Societe Generale and Credit

Agricole, 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 fell 0.6%, with

other regional markets, including Germany's DAX and

Spain's IBEX 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 slid 1.5% after

JPMorgan downgraded the stock to "neutral" from "overweight".

Finnish chemicals company

Kemira

climbed 4% after it raised its full-year

earnings outlook, pointing to continued recovery in end markets.