Winds from France bring uncertainty to the markets

The French government collapsed after Prime Minister François Bayrou lost a confidence vote in the National Assembly . MPs overwhelmingly supported the motion to impeach Bayrou, with 364 votes in favor and 194 against—a 170% majority.

Bayrou is expected to hand in his resignation on Tuesday. After the vote, Macron stated that he would appoint the seventh prime minister of his term "in the coming days." The new prime minister will have to present a new budget and win the trust of the closely divided Parliament.

Despite concerns about France's public finances, the market discounted this scenario. Although France's tendency has been to increase its risk premium relative to Germany, due to the rise in its debt yield, the yield on the ten-year bond fell about four basis points this Monday, to 3.41%. The yield on the 20-year bond corrected by the same amount, to 4.05%, and the yield on the 30-year bond fell three basis points, to 4.34%.

The CAC 40 closed the session, before the confidence vote, up 0.78% to 7,734.8 points. This was at a time when the fall of the French government was perfectly predictable.

It wasn't just Paris that closed in the green; the main European stock indices closed higher on the day the French government submitted a vote of confidence.

The PSI closed up +0.65% to 7,754.11 points with Mota-Engil shares soaring +9.41% to 5.580 euros.

The Portuguese construction company won the tender for the construction, operation, and maintenance of the submerged tunnel in Brazil, which will connect Santos to Guarajá, in São Paulo, under a 30-year concession contract costing €1.1 billion. It beat off competition from Spain's Acciona. In second place in stock market gains, but far behind, is CTT, which rose 2.68% to €7.29. Corticeira Amorim gained 1.62% to €7.53; Ibersol rose 1.45% to €9.78; BCP rose 1.29% to €0.7200; and EDP Renováveis ​​also closed up 1.20% to €10.12.

Only Sonae (which fell -0.77% to 1.2880 euros) and NOS fell -0.26% to 3.895 euros.

Returning to the topic of the day, XTB analysts argue that "the market has already priced in" the fact that François Bayrou's government lost the confidence vote. "But the biggest risks come from what might happen in the coming weeks or months," warns the brokerage.

"The vital issue, the issue of life or death, where our very survival is at stake... is the issue of controlling spending, the issue of over-indebtedness," he said, noting that the country has been producing less than others since 2000. "Our production gap with our closest neighbors, Germany and Belgium, measured by GDP per capita, is 15%, and with the Netherlands, it is over 30%," the French prime minister said in his speech to Parliament.

It is also true that Emmanuel Macron's bellicose stance on funding Ukraine's defense does nothing to help balance public finances.

The French country has already had three prime ministers in about a year, as they have been unable to approve budgets, in a context where the deficit is the highest in the eurozone.

The latest bout of instability began weeks ago when Bayrou called the confidence vote. This instability, says XTB, "particularly affected the shares of companies dependent on the national economy. Construction and infrastructure companies such as Vinci and Eiffage fell nearly 10%, while residential real estate developer Nexity fell nearly 20%.

Banking stocks also suffered, given their exposure to public debt, with Crédit Agricole and BNP Paribas each falling around 7%, the brokerage said.

"HSBC, with a further 7% decline, Accor Hotels, with 7.5%, and the insurance company AXA, with 6.7%, are also among the index's worst performers. The best performer during this period is Kering, with a 6.50% increase. More defensive companies such as Schneider Electric and Danone also stand out," adds XTB.

As in France, the political instability caused by the confidence vote has affected most banks. Since August 25, Bankinter's shares have fallen 5%, while BBVA's have lost 4.16%. Similarly, Unicaja has lost 3.85% and Sabadell 3%.

"Political instability in France could affect the euro's performance in two ways," argue analysts at brokerage XTB. "On the one hand, the European Central Bank (ECB) may have to come to the rescue of our neighbors. On the other hand, the climate of instability and the rise of Euroskeptic parties could weigh on the value of the common currency, benefiting banks such as Grifols, Santander, Amadeus, Fluidra, and BBVA," XTB adds in its analysis.

What is certain is that the longer the uncertainty plaguing the country continues, the greater the debt burden and the greater the impact on private sector confidence, which will only make it more difficult to reduce French debt at a key time when rating agencies will publish their opinions on the country's debt.

XTB argues that “confidence in the manufacturing sector has entered positive territory and GDP growth of 0.7% is expected this year, higher than the stagnation recorded in Germany.

However, the brokerage warns, "fiscal concerns are also plaguing the UK after Brexit, where 30-year government bond yields are at their highest level in 27 years. An aging population, aggressive politicians, and high deficits are common, so France remains an attractive market."

Uncertainty is relentless and the price of gold, considered a safe haven asset in times of uncertainty, reached an all-time high of $3,646 per ounce today .

On Wall Street, US stocks rose on Monday, with investors eyeing inflation data later this week to give them a sense of the reality of the possibility of a drastic interest rate cut in September.

Wall Street is already eyeing key inflation reports later this week: the producer price index (PPI) on Wednesday and the consumer price index (CPI) on Thursday. Together, the data will offer new insight into the strength of the economy following last week's weak August jobs report and other weak labor market data, as questions about a recession begin to emerge.