By Mike Bird

European stocks dropped in morning trading Tuesday, after a four-day break, with investors looking ahead to France's looming presidential elections.

The Stoxx Europe 600 index fell by 0.6% as European trading began, led by a 0.9% drop in France's CAC 40 index.

U.S. equity futures also fell slightly, with contracts on the S&P 500 down 0.17%, and those on the Dow Jones Industrial Average down 0.13%.

All eyes in Europe are on the French election, the first round of which will be held on Sunday. Two candidates go forward into the second round, and the race has been turned into a four-way split by the rise of far-left firebrand Jean-Luc Mélenchon.

"It's nervousness as opposed to concern," said Kit Juckes, global head of foreign-exchange strategy at Société Générale SA. "You have four candidates within 5% of each other, so nervousness would be a sensible reaction."

The nerves stem from the possibility that either Mr. Mélenchon or far-right candidate Marine Le Pen, who has promised a referendum on France's membership of the European Union, could outperform their polling and emerge as the victor after the second round on May 7.

The euro was up 0.09% against the U.S. dollar at $1.065 in morning trading, but signs of stress emanating from the French election were clear in other parts of the currency market.

One month euro-dollar risk reversals, which measure the cost to investors of protecting against a sudden decline in the euro, touched minus 4.3, the most extreme reading since at least 2011. More negative numbers suggest investors are paying increasing amounts to hedge against a drop in the single currency.

The dollar was roughly flat against a basket of other international currencies, with The Wall Street Journal dollar index up 0.01%.

The gap between yields on French and German 10-year government bonds, another indicator of market worries, widened slightly to as much as 0.767 percentage point in early trading. Late last year, before the French election came onto investors' horizon, the spread was as little as 0.22 percentage point.

In Asia, the Shanghai Composite Index closed down 0.79% after dropping in late Asian trading. The index fell by a combined 1.6% on Friday and Monday, its largest two-session drop since December.

Steel and iron-ore futures--which hit four-year highs last month--fell sharply again in China, where iron-ore imports and steel production of late have outpaced physical demand and where the government is trying to cool a housing bubble.

In Hong Kong, the Hang Seng also closed down, falling by 1.35%.

Elsewhere in Asia, Japan's Nikkei picked up, closing 0.35% higher. Bourses in Korea and Taiwan rose too, with the Kospi and Taiex up 0.13% and 0.31% respectively.

Kenan Machado contributed to this article.

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

April 18, 2017 04:27 ET (08:27 GMT)

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