German blue chips are more promising than French blue chips, Barclays strategists wrote in a note on Friday, saying France’s “longer-term fiscal and growth fundamentals” are weak and risks from bond vigilantes are looming.
The euro zone’s two largest economies are both in trouble. Germany is fighting a Manufacturing industry continues to slump That makes it an EU growth laggard, while disputes over its budget and long-term fiscal strategy have led to His government is about to collapse earlier this month.
However, France’s borrowing costs have surpassed those of Germany this year as the country’s political instability unsettles markets.
France is looking down Years of potential political uncertaintyGiven its deeply divided parliament, no party or faction has a majority. Investors are also concerned about the company’s ability to reduce its massive debt and Avoid credit rating downgrades.
A key question is whether French Prime Minister Michel Barnier’s fragile government can pass Budget presented in October — which would include deep public spending cuts and 60 billion euros ($65.6 billion) in tax increases — or if it would be overturned in a prior no-confidence vote.
“French budget compromise remains possible,” Barclays strategists said on Friday. “But any relief is likely to be short-lived. There are no easy solutions to the political deadlock, and long-term fiscal and growth fundamentals remain poor,” adding, They maintain their preference for Frankfurt German DAX Index paris stock index CAC 40.
France’s left-wing New Popular Front coalition said it would propose a vote of no confidence if Barnier tried to force the budget through, so the government would likely have to concede to the far-right National Rally party to pass the motion.
Doing so, the Barclays strategist continued, is “arguably a relief given the high risk premiums embedded in French assets,” potentially reducing the spread between German and French government debt (the difference in yields between the two bonds). ) from about 84 basis points pushed up the current 70 to 75 basis point range of the past few months. They said this could boost the CAC stock market index by 2% to 3%.
However, they warned that if the government fell, the spread could widen to 100 basis points and send CAC down 4% to 5%, and “bond vigilantes could step in if a stable situation does not develop for the government” or if The government budget failed to pass.
The term “bond vigilantes” refers to bond market investors selling bonds to protest monetary or fiscal policies they don’t like, thereby increasing the government’s borrowing costs.
it appears after French borrowing costs on par with Greece Recorded for the first time this week. In fact, investors are demanding the same amount of interest on French bonds as they are on historically unstable Greek bonds – already Implement comprehensive market-friendly reforms since The sovereign debt crisis of the late 2000s — is seen as an important milestone.
Risk premiums in France have risen in the run-up to summer elections, with concerns about an outright victory for the far right or left fueling jitters about populist fiscal policies that may not solve the debt problem.
CAC 40 Index Performance.
Beyond the short-term budget debate, Barclays found medium-term risk asymmetries were “less favorable” for French markets and that “concerns about political instability and longer-term fiscal trajectories are likely to persist”.
However, Barclays said any knock-on effects on the euro zone would be limited.
Jane Foley, senior currency strategist at Rabobank, isn’t convinced.
“A deterioration in French political and budget outcomes could trigger contagion across the euro zone. This would be reflected in higher bond yields and a weaker euro,” she said in a note on Thursday.
“This risk depends on budgetary and political stability elsewhere in the region. Germany’s debt and deficit position is better. That said, the country faces serious structural problems that may require more government investment. It is also possible that There is a snap election early next year, the result of which may determine whether the country’s debt brake is lifted.
“At the same time, the eurozone lacks strong leadership in both Germany and France,” Foley added.
—CNBC’s Holly Ellyatt contributed to this article.
