France’s deepening unrest has rattled financial markets across Europe, with bond yields spiking and stock indices falling sharply on Monday.
The 10-year yield on French government bonds surged around 13 basis points to 4.9 per cent, reflecting a sharp rise in the government’s cost of borrowing.
The spread between French and German 10-year yields widened to its highest closing level since early 2012 as investors priced in the risk of prolonged civil disorder.
French Prime Minister Sebastien Lecornu confirmed he had instructed regional government representatives, known as prefectures, to impose “partial curfews” across the country.
Lecornu branded the “ultra-left” as responsible for the violence, which erupted over fuel prices and the deteriorating condition of schools before spreading nationwide.
“France appears to be heading for a fiscal crisis which could lead to contagion and potentially a recession in the euro-zone,” said Andrew Kenningham, chief European economist at Capital Economics.
Kenningham added that the crisis “brought the risk of fragmentation in the Euro-zone back to the fore,” warning of broader consequences for the single currency bloc.
“A bigger crisis in France would lead to higher borrowing costs and lower growth in other Euro-zone economies,” Kenningham said, though he noted contagion risks are lower than in the 2010s.
Italy’s 10-year bond yield also jumped 10 basis points as the sell-off spread across the continent, with Rome facing its own violent clashes.
European equity markets took a heavy blow, with France’s CAC 40 and Germany’s DAX each falling 1.5 per cent and Amsterdam’s AEX sliding 0.5 per cent.
London’s FTSE 100 slumped 1.2 per cent, led lower by a broad sell-off in miners and banks as volatility spilled across the Channel.
The UK’s 10-year gilt yield rose by just over four basis points, with analysts noting that British bond markets were spared the worst of the European turbulence.
“While French bonds have come under renewed pressure as investors digest the latest political unrest, the picture in the UK has been considerably calmer, with gilts holding up relatively well ahead of next week’s Budget,” said Richard Carter, head of fixed interest research.
Carter cautioned, however, that “does not mean investors are short of things to worry about,” pointing to rising tensions in global oil markets as an additional source of concern.
Brent crude traded above $108 on Monday afternoon, extending a five per cent rally from the previous week that had already pushed prices to a five-month high.
Iran has intensified attacks on tankers in the region over the past week, with at least two container vessels disabled by mines, further unsettling energy markets.
“It looks as if there will be continued upside pressure on oil prices for as long as the US/Iran war drags on,” said David Morrison, senior market analyst at Trade Nation.
Morrison added bleakly that “the gulf between the two countries is wider than ever,” suggesting little prospect of near-term relief for energy prices or market sentiment.