French stocks slide as election debate and budget worries rattle investors

French equities dropped sharply on Thursday, with the benchmark CAC 40 index touching its lowest level since late July. The index was down 1.1%, a stark contrast to the broader European STOXX index, which slipped just 0.14%. Mid-cap French stocks also weakened, falling 0.7% to a one-month low.

Banking shares bore the brunt of the sell-off, with Societe Generale, BNP Paribas, and Credit Agricole all declining between 3.4% and 4.1%. The losses come as investors brace for the first televised debate ahead of next year's presidential election, scheduled to air later on Thursday.

Traders and analysts pointed to growing political uncertainty as a key driver. Polls suggest far-left leader Jean-Luc Melenchon could emerge as a contender in the run-off against far-right candidate Marine Le Pen. Melenchon's past proposal to cancel French debt held by the Bank of France has also weighed on sentiment, even if such ideas are seen as campaign rhetoric.

"When politicians start talking about debt write-downs as a solution to high public debt, even if those comments are largely election rhetoric, investors do not like hearing it," said Marco Vailati, head of research and investments at Cassa Lombarda in Milan.

Beyond the election, fiscal concerns loom. Prime Minister Sebastien Lecornu's minority government is expected to set its 2027 deficit target in the coming weeks and must present a budget bill to parliament by October 6. France currently runs one of the highest deficits in the euro zone.

Despite the equity weakness, French government bonds traded in line with their euro zone peers. The yield spread between French and German 10-year bonds, a key measure of risk premium, held steady at around 85 basis points.