LIVE MARKETS-No market jitters about French politics (yet)

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NO MARKET JITTERS ABOUT FRENCH POLITICS (YET)

French Prime Minister Francois Bayrou survived his latest no-confidence motion in parliament on Tuesday, as a months-long furore over reforms to the pension system rumbles on.

With talks around the 2026 budget bill fast approaching and bad memories of politically-fuelled market turmoil in 2024, how are markets reacting?

Well not much. The yield spread between French and German bonds is around 69 basis points, roughly where it was around Friday's close DE10FR10=RR. Paris' CAC 40 stock index .FCHI has been one of the weaker regional performers this year, with a gain of 3.82%, compared with a 6% rise in the broader STOXX 600 .STOXX, but it's still reversed last year's 2.2% loss.

These calm waters could change, however, according to Frédérique Carrier, head of investment strategy at RBC Wealth Management.

She believes even though the government survived yesterday's vote, it remains fragile ahead of the 2026 budget presentation later this month.

"The question could come to a head later this autumn once the debate and voting on it takes place in parliament. Should the government fall then, we believe concerns regarding fiscal sustainability could re-emerge" said Carrier.

Last June, French political turmoil saw the premium investors demand to hold French government bonds over euro zone benchmark Germany break above 80 bps to the highest since 2012, when the euro zone was being rocked by a sovereign debt crisis.

"Currently, spreads are below 70 basis points. France’s public debt exceeds 110% of GDP and the deficit is nearing 6%, which is much above French authorities and EU targets," Carrier said.

Her teams prefers a near-term underweight position in French sovereign bonds given euro-area sovereign spreads relative to Germany are relatively tight despite the current risks.

If 10-year German Bund yields rise above 2.6%, it could present an opportunity to add to positions, said Carrier.

The German bund yield DE10Y=RR stands at 2.582% currently.

(Lucy Raitano)

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