Markets
The CAC 40 Fell 1.1% and the French 10-Year Yield Jumped to 4.93% After a Weekend of Riots. Europe's Benchmark Lost 0.8%
French bonds led a European sell-off on October 19 after protests over the cost of living turned violent, with more than 500,000 people on the streets and over 2,000 arrests. The 10-year OAT yield rose from 4.80% to 4.93%, the CAC 40 closed 1.11% lower at 7,868.05, the FTSE MIB fell 1.55%, the DAX 1.18% and the Stoxx 600 0.8% to 639.56. The euro hit a 17-month low against the pound.
Europe's markets opened the week pricing a French political crisis. The yield on France's 10-year government bond rose from 4.80% to 4.93% on Monday, October 19, after a weekend in which demonstrations against the cost of living and the state of public services drew more than 500,000 people, by the police count, and ended with more than 2,000 arrests; organisers put attendance closer to 800,000. Prime Minister Sébastien Lecornu asked some local authorities to impose partial curfews and did not rule out a state of emergency. His government's 2027 budget, which aims to cut a deficit running at 5.4% of GDP, goes to parliament next month.
The selling spread along the periphery. Italy's 10-year yield rose from 4.49% to 4.57%, Spain's from 4.03% to 4.07%, and Britain's 10-year gilt from 5.37% to 5.43%. The euro fell to 84 pence, its lowest against the pound in 17 months, and fell as much as 0.5% against the dollar in Asian trading, toward its 18-month lows near $1.12, before recovering part of the move overnight. The spread between French and German 10-year yields was put at between 137 and 146 basis points by different reports, below the peak near 160 earlier this month but far above where the two traded a year ago.
Equities followed the bonds. The CAC 40 closed down 1.11% at 7,868.05 after falling as much as 1.5%; Société Générale, BNP Paribas, Stellantis and Airbus lost between 2% and 3.7%. Italy's FTSE MIB fell 1.55% to 49,086.27 and Spain's IBEX 35 1.49% to 19,039.30, both after intraday losses of 1.9%; the DAX fell 1.18% to 25,319.77, with Rheinmetall down 3.7% and RWE 3.1%, and the FTSE 100 closed 1.08% lower at 10,764.69, with Barclays down 3.5%. The Stoxx Europe 600 fell 0.8% to 639.56. Rising Russia-Ukraine tensions and the attacks on tankers in the Gulf, which kept Brent near $110, added to the mood.
The analysts quoted by the Telegraph were not reassuring. Andrew Kenningham of Capital Economics said a bigger crisis in France "would lead to higher borrowing costs and lower growth in other eurozone economies." James Athey of Marlborough said France "is in the worst of worlds compared to everybody else," and Jupiter's Alastair Irvine said bond investors were "wargaming the potential outcomes" of lending to the French state. Goldman Sachs economists warned of a possible repeat of the 2010 sovereign debt crisis. Spain has a general strike planned for November 11 and a snap general election on November 29.
For traders the relevant number is the spread, not the headlines. A French 10-year at 4.93% is still 22 basis points below the US 10-year, but it is rising while the ECB holds, and a widening OAT-Bund spread has preceded every euro sell-off of the past two years. The budget vote in November is the event; the curfews are the reason the market has started pricing it in October.