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 thwart 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 26% 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 . The spread exceeds the price of credit default swaps on a trio of major lenders for the first time in data going back to the global financial crisis.
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.”
French Finance Minister Roland Lescure said there’s still demand for the government’s bonds, and the ministry has said there’s no change in issuance strategy. Investors are closely looking for any risk of contagion from the turmoil in France, said Alexandre Baradez, chief market analyst at IG in Paris.
“The fact that the CDS of French banks are lower than France is quite reassuring in a way; it means that they are much better capitalized than they were 15 years ago,” Baradez said. “This is very different from the euro sovereign debt crisis when bailing out banks had triggered a doom loop with public debt.”
The rout in European banking stocks has pared the group’s gains this year to 12% , about half its peak in September. 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