French stocks and bonds showed resilience on Thursday, despite the political upheaval following a no-confidence vote that brought down the government and deepened the political crisis in the euro zone’s second-largest economy.
Prime Minister Michel Barnier is expected to resign later today after lawmakers from both the far-right and left voted to topple his minority government. Opposition to Barnier’s proposed 60-billion-euro budget had already been mounting, raising concerns about the government’s stability and further complicating efforts to address France’s significant budget deficit.
The French stock market reacted modestly, with the CAC 40 index largely unchanged in early trading. Meanwhile, the broader STOXX 600 saw a modest rise. Shares of the country’s largest banks performed well, with BNP Paribas, Credit Agricole, and Societe Generale all rising between 0.4% and 0.7%.
French government bonds remained stable, with the 10-year yield holding steady at 2.892%, maintaining a premium of 83 basis points over German bonds. This spread remains close to the 12-year high of 90 basis points reached last week.
However, analysts have raised concerns about the sustainability of France’s debt at current levels. Jens Peter Sorensen, Chief Analyst at Danske Bank, pointed out the potential risks for investors: “It looks cheap, but the uncertainty surrounding the government’s future and potential downgrades could deter buyers. Investors want clarity.”
There will be no new parliamentary elections until July 2025, raising fears that the French government may struggle to pass legislation in the meantime.
The political turmoil in France has been escalating since June, when President Emmanuel Macron called for snap elections that led to Barnier’s minority government. Following the elections, the premium for holding French debt over German debt surged to levels not seen since the 2012 eurozone debt crisis, and it has remained elevated ever since.
The performance of major French banks has also been under pressure. BNP Paribas has fallen nearly 15% since June, and Credit Agricole has lost around 14%. In contrast, the STOXX banking index has risen by 2.4% in the same period.
Beyond domestic issues, broader market weakness has also affected French equities, including sluggish demand from key trading partner China and growing uncertainties about global trade following the election of U.S. President-elect Donald Trump.
Foreign investment in French equities remained stable at 1.14 trillion euros ($1.20 trillion) at the end of Q2 2024, representing 38% of the CAC All-Tradable Index’s market capitalization, according to Societe Generale strategists. However, the ongoing political instability continues to weigh on investor sentiment.
