European bond and equity markets were hit by a fresh sell-off on Monday as the French government rolled out curfews to contain explosive riots that have spread across the country.
The 10-year yield on French bonds – a direct reflection of the government’s cost to borrow – spiked around 13 basis points to 4.9 per cent. 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 ongoing unrest across the country.
The sell-off spread across the continent, with the 10-year yield in Italy – which is facing its own violent clashes – jumping 10 basis points.
“France appears to be heading for a fiscal crisis which could lead to contagion and potentially a recession in the euro-zone,” Andrew Kenningham, chief European economist at Capital Economics, said.
He added the crisis “brought the risk of fragmentation in the Euro-zone back to the fore”.
“A bigger crisis in France would lead to higher borrowing costs and lower growth in other Euro-zone economies. That said, contagion risks are a lot lower than they were in the 2010s,” Kenningham said.
French Prime Minister Sebastien Lecornu confirmed on Monday he has instructed prefectures, regional government representatives in France, to put in place “partial curfews” as he branded the “ultra-left” responsible for the unrest.
The French government has been plunged into crisis after demonstrations over the price of fuel and the condition of schools erupted into riots and looting.
Bad day for European equities
Volatility spilled over into equity markets and plunged the continents’ biggest indices into the red. France’s Cac 40 was down 1.5 per cent, Germany’s DAX 1.5 per cent and Amsterdam’s AEX 0.5 per cent.
Back in London, the FTSE 100 slumped 1.2 per cent led by a sell-off in miners and banks. The UK’s 10-year gilt yield inched up over four basis points, but analysts said bond markets were spared the worst impacts of the unrest in mainland Europe.
“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,” Richard Carter, head of fixed interest research, said.
“That does not mean investors are short of things to worry about.”
He pointed to elevated tensions in the oil market as the conflict in the Middle East shows little sign of de-escalation. Brent crude traded above $108 on Monday afternoon, after a five per cent rally last week that sent prices to a five-month high.
Iran has upped its attacks on tankers in the region over the last week, with at least two contained vessels disabled by mines.
“It looks as if there will be continued upside pressure on oil prices for as long as the US/Iran war drags on,” David Morrison, senior market analyst at Trade Nation, said.
“And as things stand, the gulf between the two countries is wider than ever.