Europe midday: Sticky inflation and French politics hit markets

European markets were sea of red on Tuesday after core eurozone inflation came in higher than forecast and renewed fears about political instability in France weighed on sentiment, with banking stocks bearing the brunt of the sell-off.

The Stoxx 600 index was down 0.8% by lunchtime in Frankfurt, with losses of 1% or more registered on the Cac 40, Dax, FTSE MIB and Ibex 35 – with the latter sinking 1.9% on the back of falls in the banking sector. London's FTSE 100 was outperforming, falling by just 0.4% due to strong gains from oil majors as Brent prices headed higher.

Meanwhile, after rising strongly the previous session, stocks in France were retreating amid the prospect of a hung parliament following the weekend's snap election which showed the far-right anti-immigrant National Rally (RN) party in front.

Eyes not turn to Sunday's second-round vote, with other parties having only until Tuesday night to withdraw from the election to leave those with the best chance of winning.

"The ‘relief rally’ for the euro and French stocks we described yesterday didn’t last long," said chief market analyst Neil Wilson from Finalto. "I think the market is under-pricing the risk re France. It’s not that there will be a euro crisis on Monday morning, or a RN government would crash French bonds with a massive spending splurge, but there is undoubtedly a higher degree of economic and political uncertainty."

Inflation across the eurozone slowed slightly in June, according to preliminary estimates published on Tuesday by Eurostat. The harmonised index of consumer prices was 2.5% higher than last year, with annual inflation easing from the 2.6% rate seen in May. This was in line with the consensus forecast.

However, the annual rate of core inflation – which excludes volatile items such as food, energy, alcohol, and tobacco – held steady at 2.9%, despite expectations for a drop to 2.8%.

"June's small decline in eurozone inflation was not very encouraging, with the core component stuck above target reminding us that the disinflationary process will be gradual. Although disinflation will continue, stubbornly high services inflation rules out a July rate cut," said Riccardo Marcelli Fabiani, senior economist at Capital Economics.

Market movers

Banking stocks in Madrid were weighing heavily on the Ibex 35, with just three stocks on Madrid's benchmark index in positive territory. Among the worst performers was Banco Santander, Unicaja Banco, Banco de Sabadell and BBVA.

Outside of Spain, banks were also in red, including HSBC, Lloyds, Deutsche Bank and UBS.

Insurance companies were also out of favour, including Munich Re, Swiss Re, Beazley, Hiscox and Lancashire on the back of concerns about Hurricane Beryl, a category-five storm which is tearing through the Caribbean.

Fresh catering group Sodexo was a heavy faller after missing sales forecasts in the third quarter. Organic sales grew 6.8% to €6.07bn, coming up short of the €6.11bn estimate.

Sainsbury's fell in London despite boasting a "market-beating" grocery performance in its first quarter, as like-for-like sales growth slowed from 4.8% in the fourth quarter to just 2.7% on the back of declines in general merchandise sales and at its Argos division.

A rare bright spark across the continent was the oil and gas sector, with Brent crude rising 0.8% to $87.29 a barrel – its highest since April. BP, Shell and TotalEnergies were notable risers.