Markets relieved, but France's fiscal fire still burns

Core Insights - France's financial markets are experiencing volatility due to a significant political crisis, with sentiment showing signs of improvement but uncertainty remaining [1][2] Bond Market - The yield gap between 10-year French and German bonds has narrowed to approximately 78 basis points from nearly 90 basis points last week, indicating a shift in investor focus towards political stability [3][4] - Strong demand for French bonds (OATs) persists at current yield levels, reflecting investor confidence despite political challenges [5] Ratings and Fiscal Concerns - French borrowing costs are among the highest in the euro zone, and the suspension of pension reforms could lead to further pressure on public finances, raising the risk of credit rating downgrades [6][7] - The suspension is projected to cost France €400 million ($463 million) in 2026 and €1.8 billion in 2027, potentially affecting the debt-to-GDP ratio, which could stabilize closer to 130% by 2035 if reforms are permanently suspended [6][7] Stock Market Performance - France's blue-chip share index increased by 2.6%, largely driven by a 14% surge in luxury giant LVMH's stock following positive results, marking its best performance since April [8] - French midcap stocks have shown a 1% increase but have underperformed compared to blue-chip indices and the overall European benchmark over the past two years [8]