French assets came under renewed pressure on Monday after Prime Minister Sébastien Lecornu resigned just hours after unveiling his cabinet. The selloff in equities and widening OAT–Bund spreads reinforced what economists and strategists describe as a new normal: a volatile, fragmented France where politics, not policy, drives market sentiment.
The resignation, making Lecornu the shortest-serving premier in modern French history, compounds the challenges facing President Emmanuel Macron as he struggles to pass an austerity budget through a fragmented parliament. The political paralysis has revived questions about France’s fiscal credibility and the long-term attractiveness of its sovereign debt.
The CAC 40 was down 1.5 percent by early afternoon, while the 10-year OAT–Bund spread widened to 86 basis points, near its widest in a year. French bank stocks bore the brunt of the selloff, with Société Générale down almost 6 percent, BNP Paribas 4.5 percent lower, and Crédit Agricole off more than 4 percent.
‘Significant negative for French markets’
Berenberg chief economist Holger Schmieding warned that Lecornu’s exit “raises the risk of snap parliamentary elections later this year, or early 2026 at the latest.”
“It’s a significant negative for French markets,” Schmieding told Investment Officer. “Whereas the ECB cannot shield France from the consequences of its own political follies, it could, if need be, protect other countries against contagion. But so far, market moves remain far from the scale that would justify any ECB intervention.”
In a note to investors, his colleague Salomon Fiedler was equally blunt: “Lecornu’s resignation further increases the risk that France’s fiscal troubles will remain unresolved and that economic policies will become less growth-friendly.”
Fiedler sees little prospect of improvement in the short term: “The French economy has turned from eurozone outperformer into its main laggard. We now see even less reason for this to change any time soon.”
One more shot?
By the evening, President Emmanuel Macron had made a dramatic reversal, instructing Lecornu to lead negotiations with the opposition in search of a compromise to the crisis unsettling French markets and the euro. The president gave Lecornu one last opportunity to forge “a platform of action and stability” by Wednesday night.
“The situation remains preoccupying on the political side of course, but for the moment, it is not alarming on the economic side,” said Romain Grandis, portfolio manager at DNCA. “Nevertheless, pressure is mounting on passing a budget for next year; the next few days and weeks will be crucial in that respect.”
“We see the situation as stuck for the moment, as long as opposing parties don’t manage to compromise on important reforms,” he said.
‘Desynchronized growth environment in Europe’
At Carmignac, investment committee member Kevin Thozet said Monday’s market reaction was “relatively contained”. “Expectations seem to be that the can will be kicked further down the road. And that Macron will appoint a fourth PM since he dissolved the National Assembly in June 2024,” he said in a comment to Investment Officer.
“Unless the future candidate is a technocrat who manages to make the French electorate realize the importance of deficit problems and the French parliament reach some agreement, the budget deficit should remain somewhere between 5.5 percent or 6 percent. Not a good omen for the French OAT–German Bund spread,” he said.
Thozet sees the spread move closer towards 100 basis points. “The latest developments in French politics are expected to trigger a continuation of the desynchronized growth environment in Europe. France being held back by political instability while Germany is supported by its stimulus plan and Southern Europe is buoyed by EU funds.”
Dissolution now seen as base case
At Edmond de Rothschild Asset Management, multi-asset head Michaël Nizard told investors that “the dissolution is approaching.” In a note to clients, he said Macron’s options “are now very limited” and warned that calling new elections could fuel upward pressure on yields and further underperformance in French equities.
“The President may be forced to announce a new dissolution in the coming days,” Nizard wrote, warning that tensions could “spread to other assets such as French banks, the euro and peripheral spreads.”
Nizard said a potential victory by Marine Le Pen’s Rassemblement National — currently polling near 35 percent — could trigger “a significant widening of the French spread given the risk of further deterioration in the budgetary situation.”
If Macron delays dissolution, Nizard sees only two alternatives: a centre-left government tolerated by the Socialists with limited room for fiscal tightening, or a technocratic caretaker tasked with maintaining stability until new elections. “None of these scenarios appears particularly promising for the attractiveness of French rates,” he concluded, maintaining an underweight stance on French bonds.
Contagion limited, says MFS
“Yet another new French prime minister, another cabinet crisis, and renewed uncertainty for the markets.” said Peter Goves, fixed income strategist at MFS Investment Management.
Goves expects volatility to persist: “Macron may appoint a new centrist, a left-leaning figure or a technocrat, but the fundamental question remains how a budget can be steered through such a fragmented parliament.”
Still, he sees no need to price in systemic risk. “For now, this remains a very French affair, with limited spill-over to the broader eurozone. Our conclusion: there is little reason to expect a significant tightening of the OAT–Bund spread.”