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Let's take a quick look at tonight's European and US stock market movements.
On the evening of October 20, European stock markets collectively plunged, while US stock futures fell by a somewhat smaller margin. Among them, France suffered a double blow in both stocks and bonds.
French government bond yields climbed further on Tuesday. This followed the previous day's surge, which marked the largest single-day increase in nearly a month. As protest groups announced plans for a new round of demonstrations this Saturday, investors remain cautious.
The French government is currently facing severe challenges: on one hand, it must work to control the fiscal deficit, and on the other, it must deal with large-scale protests triggered by rising living costs.
The yield spread between French 10-year government bonds and safer German bunds broke through 150 basis points, reaching 154 basis points, the highest level since October 2. Over the weekend, a new wave of unrest erupted in France. Driven by public anger over persistently rising prices, protests spilled onto the streets, with public buildings, shops, and restaurants attacked in multiple locations. French authorities subsequently imposed stricter security measures, including curfews, before the protests gradually subsided.
Karen Ward, Chief Market Strategist for Europe, the Middle East, and Africa at JPMorgan Asset Management, said: "Today, the bond market offers more investment choices. If investors do not trust the government, company, or industry borrowing money, they will demand higher borrowing costs. What is happening in France right now precisely demonstrates that the bond market has strong bargaining power, because investors can simply put their money elsewhere."
France's public debt has already exceeded its gross domestic product (GDP), and its fiscal deficit ranks among the highest in the eurozone. This means the government cannot simply calm voters by increasing fiscal spending. More troubling is that with only six months until the presidential election to choose Macron's successor, France is in a highly sensitive period of concentrated political and financial pressure.
In the view of the BlackRock Investment Institute, the recent fierce sell-off in French government bonds reflects an escalating global battle for capital. BlackRock strategists wrote in a report: "The sell-off in French government bonds shows that against the backdrop of global interest rate repricing, competition for capital is reshaping fixed income markets. Today, understanding why bond yields are rising, and whether the returns investors receive are sufficient to compensate for the risks they bear, is becoming increasingly important."
Currently, investors are debating whether the European Central Bank will take action to stabilize the French bond market. But the market widely believes that ECB policymakers are unwilling to intervene easily. Rather than directly bailing out France, they prefer to let market pressure do its work, forcing the French government to implement necessary structural reforms and improve its fiscal position. Earlier on Tuesday, ECB Governing Council member Olli Rehn said that all eurozone countries, including France, must control public fiscal deficits to ensure debt sustainability. Analysts say this situation is precisely the root of current market tensions. The rise of extreme political forces in France and Germany further increases uncertainty about Europe's future ability to respond to crises. The yield spread between French and German government bonds will continue to widen.
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