It dawns in the eurozone with a reddish color in the financial markets that once again has France as the protagonist. The euro falls more than 0.6% against the dollar, France’s risk premium shoots up to highs not seen since 2012 (in the midst of the euro sovereign debt crisis) and the stock markets fall sharply. All because the Government of France, the second largest economy in the euro, is faltering (all the keys to this crisis). In a sense, the Government faces imminent collapse in the midst of a ‘fiscal crisis’, led by a growing public deficit and pressure from opposition parties and society to continue increasing public spending to cover increasingly expensive pensions. France finds itself in a kind of impasse that seems to have no solution in the short term.
The far-right National Rally party has spoken out with much more aggressive language and threatened to overthrow the French government as soon as this week, hours after Finance Minister Antoine Armand said his administration would not comply. I would let blackmail. Marine Le Pen and her party have threatened to support a vote of no confidence unless the prime minister Michel Barnier modify his budget for 2025 to index pensions to inflationamong other requests. Le Pen has assured Barnier that she needs to make the changes before Monday, which is when opposition lawmakers are expected to begin the process of calling the no-confidence motion.
Although Armand has pointed out Bloomberg Television In an interview Sunday that “the French government does not accept ultimatums” and that “we will not allow ourselves to be blackmailed,” National Rally President Jordan Bardella ramped up the rhetoric early Monday. “National Rally will activate the motion of censure unless, of course, there is a last-minute miracle,” Bardella told the radio. RTL. “If Barnier changes his text between now and 3 p.m., I have little hope that it will see the light of day, given that we have been ignored and despised for several months.” Everything indicates that the French Government is facing an imminent collapse, which is beginning to be discounted and reflected in the markets.
The euro falls, the risk premium rises
The euro is losing more than 0.6% against the dollar and is touching $1.052 per unit of the single currency. The fall has worsened as the hours have passed on this Monday, which promises to be intense in the markets for France and, consequently, for Europe. On the other hand, the French risk premium is now close to 90 basis points, a level that has not been seen since the end of 2012, when the euro zone was in the throes of the sovereign debt crisis that almost caused the disintegration of the euro zone.
The decline of the euro is one of the signs that show the real risk of collapse of the French Government, since the single currency reflects the political and economic situations of the 20 economies that make up the single currency. The weight of France in the euro zone, the second economy of the bloc and an integrating engine (France always wants to go further with the integration of the euro zone), is putting a single currency that was already facing the risks that it has brought back Donald Trump’s victory in the US.
The stock markets quote the scenario
As it could not be otherwise, equities are also being shaken as a risk asset that they are. The growing halo of uncertainty in French politics and finance is quickly being reflected in the stock markets. The CAC 40, the reference stock index in France, is the one that shows the worst performance this Monday, with drops that have exceeded 1% and that have only been mitigated a few tenths later.
The outlook for the French stock market is anything but positive. The French stock market is on track to post its worst performance against its European peers since 2010. The CAC 40 trails the Stoxx 600 by more than 11% so far this year. Investor doubts have increased due to political stagnation and deteriorating credit prospects. Major credit rating agencies gave France a negative outlook last month, citing deteriorating public finances and political challenges in containing ballooning budget deficits, and that has weighed on stocks.
“In recent months, equity investors have gradually reduced their exposure to French equities in the face of growing uncertainty surrounding parliamentary elections, which have increased political risk. Despite this, relative valuations remain elevated compared to their historical averages, while the earnings outlook appears mediocre, with single-digit growth forecast for 2025 and possible downward revisions,” analyzes Leonardo Pellandini, equity strategist at Julius Baer.
As Pellandini explains, it is no longer just that short-term budget instability persists, but that the proposed corporate tax increases could have a substantial impact on the equity market. Specifically, the planned increase in corporate tax from 25% to 33.5% could significantly affect the French equity market, potentially reducing CAC 40 earnings per share (EPS) growth by around 2.5%. in 2025, says the strategist. Additional headwinds are expected to arise from the consumer cyclical segment, which has a significant weighting towards luxury goods, he adds.
“Given the current political turmoil, bleak earnings outlook and unattractive valuations, we expect French equities to continue to underperform their European peers and have changed our rating from Neutral to Underweight. However, we identify specific opportunities in the French banking and also in the French industrial sector, where companies exposed to the electrification trend can offer attractive investment prospects,” concludes the Julius Baer analyst.
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