French markets tumbled on Monday, with bonds, Paris-listed stocks and the euro all falling after a weekend of widespread protests underscored the difficulty the government faces in reducing its large deficit. Reuters reported that a slide in bond prices pushed France's 10-year yield up 13 basis points to 4.9%, on track for its largest one-day rise since late September, while the gap between French and German yields — the premium investors demand to lend to France rather than Germany — hit 146 basis points, its highest in two weeks. Alliance News' London market close put the CAC 40 down 1.1% on the day and the 10-year yield at 4.94%, up from 4.79% at Friday's close.
French stocks were the worst performers among major European exchanges. Shares in two of France's biggest lenders, BNP Paribas and Societe Generale, each fell 3%, and retailer Carrefour fell 1.8%, with its CEO saying the company's losses from protest damage would run into the tens of millions of euros. The euro slipped 0.2% to 0.3% against the dollar, the pound and the yen, the cost of insuring French sovereign debt rose, and investors warned the jump in French yields could spill over to other heavily indebted euro-zone countries, with Italy — whose 10-year yield rose 11 basis points to 4.58% — the first to watch.
"The fact this is coming after a weekend of protests shows that hopes for reform are in remission."
Hank Calenti, global market strategist at SMBC, tied the sell-off directly to the unrest, pointing at efforts to reduce deficits and reform pensions. Investors say France needs to pass a budget bill to rein in its finances, but the protests demonstrate how difficult that could be, and political jostling ahead of next year's presidential election could complicate matters further. The country is already contending with weak growth and ballooning debt, and at one point this month its 10-year yield hit 4.99%, the highest since 2002 — a level yields are now heading back towards.
The market verdict landed as the government fought to restore order after some of France's worst unrest in years — thousands arrested and shops looted during protests over high prices and declining public services. Paris and other cities face curfews tonight; Prime Minister Sébastien Lecornu, who says the government is determined to restore order and blames organized networks for the violence, did not rule out declaring a state of emergency. The next test comes Friday, when Moody's reviews France's credit rating. Commerzbank analysts played down that risk, noting that "as Moody's is merely catching up with other rating agencies, headwinds for spreads from the downgrade are likely to remain limited" — but the numbers investors are watching are the ones Paris posted on Monday: a CAC 40 down 1.1%, and a 10-year yield back at the edge of 4.9%.
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