Weekly Update - French markets under pressure again in the face of political uncertainty

The announcement of an upcoming vote of confidence by François Bayrou has revived political risk in France, leading to further turbulence on the financial markets. For the time being, these tensions remain contained and mainly confined to the French markets, but they accentuate an underperformance already noticeable since the dissolution of the National Assembly in June 2024.
 
A new sequence of political instability. Prime Minister François Bayrou announced on Monday 25 August that he would seek a vote of confidence on September 8th in the National Assembly, on the occasion of the presentation of his budget savings plan for 2026. This initiative comes at a time when the government does not have a clear majority, and the main opposition groups have already announced their intention to vote against it. Several scenarios are emerging at the end of September 8th: (i) the continuation of the current government in the event of success – an unlikely hypothesis in view of the opposition's positions –, (ii) the appointment of a new Prime Minister, or (iii) a new dissolution of the National Assembly, which would imply the holding of early elections before the formation of a new government. This vote of confidence is thus in line with the political instability that has prevailed in France since June 2024.

Public finances: little hope for improvement in the short term. France stands out from its neighbours by the deterioration of its public finances. According to the European Commission, the French public deficit is expected to remain above 5% in 2025, compared to around 3% in the main economies of the euro area. Even excluding interest charges, the primary deficit remains significantly higher in France, particularly compared to Italy, which now has a positive primary balance as of 2024, a sign of significant fiscal efforts. Whatever the outcome of the vote of confidence on September 8th , the climate of political instability does not seem to be hardly conducive to a significant change in the budgetary trajectory by 2026.

Growth: a weak economic and financial environment. French growth remains sluggish, with a cumulative increase of only +1% since January 2024, against 4% for Spain, while Germany is stagnating (0%). Political uncertainty continues to weigh on consumer and business confidence, prompting them to focus on savings over investment and consumption. In addition, this instability is increasing the pressure on credit rates, due to the rise in French government bond yields, which is further hampering investment decisions.

French financial markets penalised for a long time. The announcement of the confidence vote has caused further tremors on the financial markets. The 10-year yield on French government bonds is now above 3.5%, widening the gap with German rates. The CAC 40 lost nearly 2,9% this week. At this stage, these tensions remain moderate and concentrated in the French markets, but they aggravate the underperformance observed since the dissolution of the National Assembly. Since the beginning of the year, the French equity market has posted a performance of +5%, while the German, Italian and Spanish markets have risen by more than 40% (broad indices, dividends reinvested). In addition to the political risk, the sector composition of the French market – overweight in luxury stocks and underweight in financials, the latter being the best performers since the beginning of the year – is an additional handicap. At the same time, the French bond market recorded a cumulative performance of +2% over the period, significantly lower than that of the Spanish and Italian markets (nearly +5% and more than +7% respectively). This underperformance can be explained both by a less attractive level of interest rates than in Italy (carry effect) and by a stability in interest rates, while they have fallen sharply in Spain and Italy (value effect).

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