France: markets close to their lowest level in four months due to government crisis

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French markets deepened their losses on Wednesday amid political unrest, with the CAC 40 index losing 1.3% in one point to reach its lowest level since August 6. The benchmark index recovered some losses and ended 0.72% lower, but remains near its four-month low. On Thursday, the index opened in the green, up 0.56% to 7,180.19.

French Prime Minister Michel Barnier risks censure of his government by the opposition in Parliament if he uses constitutional tools to push through his budget plan (the Constitution's infamous article 49.3). Left-wing parties and the far-right National Rally have the power to table a motion to this effect and overthrow the French government.

French markets underperform their global counterparts

The French stock market has been under pressure for months due to political unrest. The CAC 40 is one of the few to record negative performances this yearwhile global benchmark indices all show strong growth. Since the start of the year, the index is down 5.3%, while the Euro Stoxx 600 has increased by 5.6% and the DAX by 15%. Globally, Wall Street has repeatedly hit new highs, with the S&P 500 rising nearly 26% and China's Hang Seng Index climbing 13% this year.

French banking stocks were the most affected due to the uncertainties weighing on the country's public finances. BNP Paribas SA shares fell 3% to a six-month low on Wednesday. The shares of the leading French bank have lost more than 11% since the start of the year, while the Euro Stoxx 600 banking index has increased by 18%. Shares of insurance company AXA fell 4.3% and those of Crédit Agricole fell 1.3% on the same day.

Political unrest in France

In June, former Prime Minister Macron Emmanuel called early elections, which resulted in the formation of a minority government after the appointment of Michel Barnier as the new leader. The veteran conservative unveiled his budget plan, which aims to reduce the state's debt level through significant spending cuts and tax increases. However, the bill faces fierce opposition from left-wing alliances and the far-right populist leader of the National Rally, Marine Le Pen.

This political impasse raises fears of a potential Greek-style crisisbecause France's deficit is expected to reach 6.1% of its gross domestic product (GDP) this year, i.e. more than double the limit required by the European Union. According to European Commission projections, France's debt-to-GDP ratio is expected to reach 112.4% in 2024, the second highest ratio in the EU. The government's plan to reduce that ratio by 5.1% next year is widely seen as unworkable. In May, S&P Global Ratings lowered France's credit rating from AA to AA-, forecasting a deficit of 3% of GDP until 2027.

Concerns over France's political and financial stability have pushed the spread between German and French government bond yields – a key measure of market risk sentiment – to 86 basis points, the widest level since July 2012.

The euro could come under further pressure

Political uncertainty in France, Germany's auto industry crisis and Trump's tariff threat have contributed to a darkening economic outlook for the euro zone. This will likely lead to further depreciation of the euro against other G-10 currencies, particularly the US dollar. EUR/USD slipped slightly overnight to 1.05 at 5:50 a.m. CET today, remaining at a one-year low.