French markets, euro battered as government collapses

France's political crisis deepened following the unexpected resignation of Prime Minister Sebastien Lecornu over budget plan disputes, triggering a broad sell-off in French assets and the euro. The CAC 40 plunged 2%, with major banking stocks down 4-5%, while the euro slid 0.7% to $1.1665. French 10-year bond yields rose 7.4 basis points, widening the spread over German bunds to 86.58 bps, reflecting increased investor concern over political instability and its potential for wider European market contagion.

Analysis

LONDON, Oct 6 (Reuters) - French assets slid along with the euro on Monday, after new Prime Minister Sebastien Lecornu resigned given mounting pressure from leftist lawmakers over his budget plans, thrusting the euro zone's second-largest economy deeper into crisis. Paris' CAC 40 (.FCHI) dropped 2%, making it by far the worst-performing index in Europe, as banking shares came under heavy fire, leaving BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA) down 4-5%. The Week in Breakingviews newsletter offers insights and ideas from Reuters' global financial commentary team. Sign up here. Advertisement · Scroll to continue The euro slid 0.7% on the day to $1.1665. Lecornu's swift resignation was unexpected and unprecedented and marked another major deepening of France's political crisis. "It’s concerning that the new cabinet only lasted 12 hours," said Danske Bank analyst Kirstine Kundby-Nielsen. "There seems to be no willingness in parliament for a budget to be passed, so I think yields higher, pressure on euro-dollar in the near term." French mid-cap stocks were hit hard, tumbling 3% and set for their largest one-day drop since April, while other European markets did not go unscathed either. The broader STOXX 600 (.STOXX) dropped 0.4%, while Germany's DAX (.GDAXI) fell 0.2%. Advertisement · Scroll to continue "It certainly makes people wary about European assets at this point because of the uncertainty and the spillover effects that go from France just being unable to find its way out of this malaise," IG Group chief market analyst Chris Beauchamp said. French bonds came under pressure, pushing yields on benchmark 10-year debt up 7.4 basis points to 3.585%. That left the premium investors demand to hold French debt, rather than triple-A rated German paper , at 86.58 bps, the most since January this year. This spread hit a 2012 high of 90 bps in last November. Additional reporting by Samuel Indyk, Lucy Raitano and Shashwat Chauhan ; Editing by Andrew Cawthorne and Dhara Ranasinghe Our Standards: The Thomson Reuters Trust Principles. The unexpected resignation of France's new Prime Minister over budget plan disputes has triggered a significant risk-off event, centered on French assets. The market reaction was severe and immediate, with Paris' CAC 40 index falling 2%, significantly underperforming the broader European STOXX 600's 0.4% decline. The financial sector has been hit particularly hard, with major banking stocks including BNP Paribas, Societe Generale, and Credit Agricole plummeting 4-5%. In fixed income, the political instability has fueled a flight from French sovereign debt, pushing the 10-year bond yield up by 7.4 basis points to 3.585%. This has caused the premium over German bunds to widen to 86.58 basis points, its highest level since January, signaling a material increase in perceived sovereign risk. The crisis has also weighed on the common currency, with the euro sliding 0.7% to $1.1665 against the dollar, reflecting analyst concerns over France's inability to pass a budget and the potential for a protracted political malaise that could have spillover effects on broader European asset classes.

Key Decisions for Investors

• Re-evaluate and consider reducing exposure to French equities, particularly in the banking sector, given the direct impact of political instability on domestic economic sentiment and corporate outlook.
• Monitor the French-German 10-year bond spread as a key real-time indicator of sovereign risk; its widening to 86.58 bps suggests opportunities for relative value trades for investors anticipating further political turmoil.
• Consider hedging long euro positions or initiating tactical short positions, as the currency faces significant near-term pressure from the unresolved leadership crisis in the euro zone's second-largest economy.
• Investors should remain vigilant for signs of contagion into other European markets, as a prolonged crisis in France could escalate into a broader regional sell-off, impacting assets beyond domestic French securities.