From Bloomberg, August 26:
French assets came under pressure for a second day as concern the government will fall in a showdown over proposed budget cuts rattled investors.
The benchmark stock gauge slumped 2.1%, extending losses from Monday when Prime Minister Francois Bayrou announced that he would call a confidence vote in his own government. The yield difference between French and German 10-year debt — a key measure of risk — hit its widest since April.
Investors are getting a reminder of France’s volatile politics and fragile finances as the nation’s assets retreat toward levels seen a year ago. Political wrangling over the government’s debt burden in 2024 ultimately led to the ouster of Bayrou’s predecessor after only 90 days — and the loss of any semblance of a parliamentary majority for President Emmanuel Macron.
“This is a blatant comeback of the risk premium on French assets which had always been in the background,” said Andrea Tueni, head of sales trading at Saxo Banque France. The market is “acknowledging the fact that France is in a deep political crisis amid a difficult economic backdrop.”
French financial stocks were among the biggest decliners, with AXA SA, Societe Generale SA and BNP Paribas SA all down 6% or more. A Barclays basket containing companies most exposed to French domestic risks, including fallout from the budget, slid 4.4%.
The euro traded flat at $1.1621, paring earlier gains. One-week volatility headed for its biggest jump in a month, with the political risk in France adding to the move.
Bayrou said Monday that Macron had agreed to call parliament back into session early in order to allow the government to present its fiscal plan and to hold the confidence motion.
The far-right National Rally party, the leftist France Unbowed and the Greens all said they would vote against the Sept. 8 motion while the Socialists said they wouldn’t back the government. If a majority of lawmakers vote against Bayrou, he’ll be forced to submit his government’s resignation — the same fate that befell Michel Barnier’s administration last year.
Risky Gamble
Oddo BHF strategist Thomas Zlowodzki said Bayrou’s gamble is risky and there’s a high chance of the government failing. His team is underweight on French stocks on the grounds that their valuations do not fully price this risk.Meanwhile, the nation’s 10-year yields are now among the highest-yielding in the eurozone, having already surpassed countries once at the heart of the European sovereign debt crisis such as Greece and Portugal. The moves this week have left the yield just eight basis points below Italy’s.
“The big next step would be the yield on French 10-year bonds topping those of Italy,” said Saxo’s Tunei. “That would really be a significant milestone.”
Read more: France’s Government Risks New Collapse, Weighing on MarketsWhat Bloomberg Strategists Say...
“Political instability is eroding French bonds’ traditional core status. With austerity plans dividing parliament, France’s borrowing costs risk climbing further, leaving both bonds and equities struggling to regain momentum.”
—Nour Al Ali, Macro Markets & Squawk, London. Click here
for the full analysis.
French stocks have been battered since Macron called a snap parliamentary vote early June last year, taking markets by surprise.
The CAC 40 has dropped over 4% since then, while the Stoxx Europe 600 rose about 6%. The CAC is set to underperform the pan-European benchmark for a second year, a sharp turnaround for the French index which outperformed every year but one since Macron was elected in 2017....
....MUCH MORE
The CAC 40 is currently down 130.71 (−1.67%) at 7,712.34. Here's the five day chart from TradingView:
