Banks have been Europe’s best-performing stocks for two years, and were on pace for stellar gains again in 2026. The return of French debt worries is threatening to derail the rally.
The Stoxx 600 banks sector fell as much as 2.2% on Thursday, adding to Wednesday’s 3.3% selloff and putting it on course for the biggest two-day decline since March. Societe Generale SA has fallen 25% from its August peak, while Deutsche Bank AG has tumbled 18% from its high point last month.
Concerns over France’s fiscal deficit and political gridlock have hit the region’s markets, with investors shunning French bonds. The yield premium they demand to hold the country’s sovereign debt versus German bunds last week touched the highest since 2011 . French Finance Minister Roland Lescure said there’s still demand from investors for the government’s bonds and there’s no change in issuance strategy.
Read More: France’s Debt Is Now Riskier Than 38% of Nation’s Company Bonds
“Typically banks are on the front line whenever systemic risk is mentioned,” said Jerome Legras, head of research at Axiom Alternative Investments. “It’s a sector that has done remarkably well this year, so it’s not surprising to see some pullback at some stage. My take is that the macroeconomic uncertainty, particularly on growth, yields and the ECB’s next move, is behind most of the volatility.”
The recent rout in European lenders’ stocks has pared the group’s gains this year to less than 12%, nearly halving it from a peak in September at about 23%. The banks are still outperforming US peers and broader regional benchmarks this year, but the selloff has taken the Stoxx 600 Banks Index’s 14-day relative strength index nearly into oversold territory.
Read more: Whispers of Contagion Risk Return to Europe’s Bond Market