French stocks dropped sharply, especially bank stocks, and the country’s bonds also fell on Tuesday as the government faces a growing risk of being removed next month.
Three major opposition parties said they won’t support a confidence vote scheduled for September 8, which Prime Minister Francois Bayrou called to push through major budget cuts.
France’s CAC40 stock index fell over 2%, after dropping 1.6% late Monday. Big banks like BNP Paribas and Societe Generale saw their shares drop more than 6%.
The yield on France’s 10-year government bond rose by 4 basis points to 3.53% early in the day, the highest since March, before settling at 3.50%. (When bond yields rise, their prices fall.)
The gap between French and German 10-year bond yields, which shows the extra risk investors see in holding French debt, widened to 79 basis points, the largest since April.
Analysts expected political tensions in France to rise in the fall as the government works to gain support for improving the country’s finances. However, Monday’s events were unexpected.
If Prime Minister Bayrou loses the confidence vote in the National Assembly, his government will collapse. President Emmanuel Macron could then appoint a new prime minister, ask Bayrou to lead a temporary government, or call for an early election.
Looking at major European indexes, the DAX was down as much as 1% in early trade but has since pared some losses trading around 0.54% at the time of writing. The industrials and financial sectors weighed on the index with losses of 1.28% and 1.58% respectively.
The FTSE 100 which enjoyed a good run last week with fresh all-time highs is also struggling this morning. The index is down around 0.8% at the time of writing with consumer cyclicals and financial the biggest losers on the day with Standard Chartered PLC down as much as 2.89%.
On the FX front, The euro and British pound stayed mostly unchanged against the dollar, trading at $1.1617 and $1.3461, respectively. Other currencies, like the Japanese yen and Swiss franc, also saw little movement.
The dollar index, which tracks the dollar against six major currencies, remained steady at 98.42 after recovering from an earlier 0.4% drop. Meanwhile, China’s offshore yuan traded at 7.1635 per dollar, near its strongest level in a month, as the stock market continued to rise.
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