French markets suffered a broad selloff on Monday. A wave of large-scale protests combined with a dimming outlook for fiscal consolidation sharply heightened investor concerns over France's sovereign bond risk premium, sending bonds, stocks, and the euro lower in tandem.
As of press time, the yield on France's 10-year government bond had surged 15 basis points in a single day to 4.93%, the largest one-day increase in nearly a month, while the spread against comparable German bunds widened to 146 basis points, a two-week high.
The CAC 40 index fell 1.5%, with France's two major banks, BNP Paribas and Societe Generale, both dropping about 3%, leading declines among major European markets. The euro fell 0.2% to 0.3% against the US dollar, the British pound, and the Japanese yen.
According to a Monday report by Xinhua News Agency, protest demonstrations broke out in multiple locations across France in recent days, with violent riots erupting in the capital Paris and other areas. The protesters' demands centered on rising living costs and declining public services, highlighting the governance dilemma France faces as a fiscal crisis, welfare pressures, and political polarization intertwine.
According to preliminary statistics, more than 2,000 people were arrested across France during the protests on the 17th, and hundreds of businesses suffered severe property damage.
According to Bloomberg, France's central government has asked some local authorities to impose curfews, and Prime Minister Sebastien Lecornu has not ruled out the possibility of declaring a state of emergency.
Fiscal Consolidation Meets Political Resistance
At the heart of this turmoil is eroding market confidence in France's ability to effectively reduce its fiscal deficit. France's weak economic growth and continuously expanding debt burden had already weighed on the country, and the social unrest has further cast a shadow over budget reform.
Hank Calenti, a global market strategist at SMBC, said: "This market volatility came after large-scale protests, indicating that reform expectations are fading." The reforms he referred to cover two major issues: reducing the fiscal deficit and advancing pension reform.
Investors widely believe that France must quickly advance budget bill legislation to rebuild confidence in its fiscal trajectory. However, political maneuvering ahead of next year's presidential election may make this process more complicated.
Calenti also noted that the shock has already spread across the entire eurozone, with reform prospects dimming in multiple markets. Notably, Germany's 10-year government bond yield also rose 4 basis points on Monday to 3.45%, while US Treasury yields moved lower over the same period.
France-Germany Spread Widens Again, Italy Under Pressure
The spread between French and German 10-year government bonds widened to 146 basis points, the highest level in two weeks. Although it has pulled back from a high of about 160 basis points in early October, market trends suggest the spread risks returning to that peak.
In early October, France's 10-year government bond yield briefly touched 4.99%, the highest level since 2002, and this week the yield is once again approaching that key threshold.
Markets worry that volatility in French bonds could spread to other highly indebted eurozone economies, with Italy seen as the primary candidate for contagion. On Monday, Italy's 10-year government bond yield also rose 11 basis points to 4.58%.
Analysts also pointed out that the growing participation of hedge funds in the French bond market is amplifying market fragility, a risk that has drawn close attention from regulators.
French Bank and Retail Stocks Hit Hardest
French stocks became the worst-performing major market in Europe, with the CAC 40 index falling 1.5%, steeper than the roughly 1% decline in the Stoxx Europe 600 index.
French bank shares fell particularly sharply — BNP Paribas and Societe Generale both dropped about 3%. Historical patterns show that whenever the France-Germany spread widens, French bank stocks tend to come under pressure first.
The retail sector was not spared either. Shares of Carrefour fell 1.8%, with its chief executive saying the company's losses from protest damage would reach tens of millions of euros.
France's sovereign credit default swap (CDS) premium also rose 5 basis points to about 82 basis points. Although still below the peak of 89 basis points on October 2, it was the worst-performing sovereign CDS in Europe on the day.
Moody's will review France's sovereign credit rating this Friday, and there is a possibility of a downgrade, which could bring additional pressure to the French bond market.
However, analysts at Commerzbank believe the impact of a downgrade on spreads is likely to be limited. "Moody's move is merely catching up with other rating agencies, so the negative impact of a downgrade on spreads may be quite limited."
Comments