European Stocks Fall as France Plunged Into Crisis: Markets Wrap

(Bloomberg) — European stocks dropped, with France’s CAC 40 benchmark plunging more than 2% amid fresh political turmoil. Bonds fell and the euro weakened.

French lenders Societe Generale SA, Credit Agricole SA and BNP Paribas SA led declines in the Stoxx Europe 600 index as the nation’s 10-year yield jumped. Prime Minister Sebastien Lecornu resigned just a day after President Emmanuel Macron named a new cabinet, deepening the country’s political crisis. The euro fell against the dollar.

Lecornu’s departure comes after his two predecessors were felled by the same problem: having to pass a budget through a fractured parliament that included unpopular spending cuts and tax increases needed to rein in the largest deficit in the euro area. That’s raising uncertainty about the outlook for the region’s second-largest economy.

“Alongside this political uncertainty/crisis, one can expect an economic one (sentiment is likely to deteriorate) given the uncertainty surrounding the wide budget deficit,” said Stephane Ekolo, a strategist at TFS Derivatives. “Banks and financials overall are likely in this uncertainty to be under pressure.”

What Bloomberg Strategists say….

“Markets are quite good at adapting to known unknowns. Political paralysis in France is just that at the moment. But equally, markets don’t have unlimited patience. Unless a grip is taken of the country’s unsustainable fiscal situation in the relatively near future, risk spreads are liable to blow out again.”

— Simon White, Macro Strategist. For the full analysis, click here.

Elsewhere, US equity futures rose as investors bet that a resilient economy and Federal Reserve easing will continue to support corporate earnings and the boom in artificial intelligence spending. Stocks in Japan surged and the yen plunged after the election of a pro-stimulus leader.

Contracts on the S&P 500 climbed about 0.3% after the index gained more than 1% last week despite a US government shutdown that’s delayed key economic data. Contracts on the Nasdaq 100 were up about 0.5%.The yield on 10-year Treasuries rose about three basis points, and a gauge of the dollar climbed.

A number of private-sector indicators out last week pointed to a sluggish US labor market and moderation in demand, without raising alarm bells on the outlook for economic growth. That’s left traders confident the Fed will deliver another quarter-point cut in October, allowing them to look past the US government shutdown and the threat of firing federal workers.

“The base-case scenario remains one of slow but steady growth, continued disinflation, and a gradual rate-cutting cycle by the Fed toward year-end,” said Linh Tran, a market analyst at XS.com. “Against this backdrop, the S&P 500 is expected to maintain a measured upward trajectory, supported by improving corporate earnings, stable valuations, and persistent institutional inflows.”

Meanwhile, the US government shutdown, which kicked in on Wednesday, is driving investors to haven assets in what market participants have begun to call the “debasement trade.” Gold rose above $3,900 an ounce to yet another record, extending a rally that’s been a feature of commodity markets all year. Bitcoin also set another all-time high over the weekend.

Japan’s Nikkei 225 index jumped 5% to an all-time high as Sanae Takaichi was in line to become Japan’s next prime minister. The yen slid almost 2% to 150 per dollar, while falling to a record low against the euro. Longer-maturity Japanese bonds fell the most in months on concern a Takaichi government may sell more debt to finance tax cuts.

Takaichi’s surprise victory in a ruling party leadership vote in at the weekend reduced expectations that the Bank of Japan may hike interest rates as soon as this month while raising worries about more debt supply to finance stimulus. Overnight index swaps priced in about a 25% chance of an increase, down from 60% before the Liberal Democratic Party election.

Oil advanced after OPEC+ agreed Sunday to revive just 137,000 barrels a day of halted supply — a slower pace than earlier this year.

“Investors are actively balancing the potential upside of stimulus against bond market risk,” said Dilin Wu, a strategist at Pepperstone Group. “Investors will need to watch Japan’s fiscal-monetary interplay, bond market movements, and yen volatility closely — these will be the main drivers of cross-asset positioning in the coming weeks.”

Corporate News:

Boeing Co. is guiding suppliers that 737 Max output could reach a 42-jet monthly tempo as early as October, according to people familiar with its plans. Tata Capital Ltd. is poised to start taking orders for an initial public offering that may raise as much as 155 billion rupees ($1.7 billion) in India’s biggest deal of its kind this year. Freeport-McMoRan Inc. said it found five more workers dead at the Grasberg copper mine in eastern Indonesia, following a mud flow that has halted production. Stellantis NV is planning to invest about $10 billion in the US as the troubled maker of Jeep sport utility vehicles and Ram pickups refocuses on the market that’s pivotal to its profits. Nikon Corp.’s stock rose its most in more than two weeks after disclosing that EssilorLuxottica SA increased its holding, suggesting the Ray-Ban maker is placing a bigger bet on a pivotal supplier of chipmaking equipment. Some of the main moves in markets:

Stocks

The Stoxx Europe 600 fell 0.2% as of 9:56 a.m. London time S&P 500 futures rose 0.3% Nasdaq 100 futures rose 0.5% Futures on the Dow Jones Industrial Average rose 0.1% The MSCI Asia Pacific Index rose 0.2% The MSCI Emerging Markets Index fell 0.3% Currencies

The Bloomberg Dollar Spot Index rose 0.5% The euro fell 0.6% to $1.1669 The Japanese yen fell 2% to 150.37 per dollar The offshore yuan fell 0.2% to 7.1483 per dollar The British pound fell 0.3% to $1.3438 Cryptocurrencies

Bitcoin rose 0.9% to $123,885.87 Ether rose 1.4% to $4,563.96 Bonds

The yield on 10-year Treasuries advanced three basis points to 4.14% Germany’s 10-year yield advanced two basis points to 2.72% Britain’s 10-year yield advanced five basis points to 4.74% Commodities

Brent crude rose 1.5% to $65.53 a barrel Spot gold rose 1.5% to $3,945.37 an ounce This story was produced with the assistance of Bloomberg Automation.

–With assistance from Hideyuki Sano, James Hirai, Anand Krishnamoorthy and Michael Msika.

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