Summary
Dans un contexte politique et économique instable, le budget français à venir suscite la prudence des marchés, qui ajustent leurs positions sur les obligations et les actions.
Key points
A narrow path ahead for the French government: French Prime Minister François Bayrou will seek a vote of confidence on September 8, ahead of the October 1 budget discussions, facing opposition intent on blocking his budget plan. Regardless of political outcomes, the French institutional framework guarantees budget approval; if a new budget is not enacted, the previous year’s budget remains in force by decree until a new finance law is adopted.
Outlook for the French economy and debt: France's economic growth is expected to mildly improve, supported by stronger consumption and investment, though policy uncertainty may weigh on confidence. While public debt is set to rise due to persistent deficits and higher interest costs, the low cost of debt compared to the past and a longer debt maturity profile have kept debt servicing manageable, reducing the impact of rising rates. However, accelerating fiscal consolidation next year will be key to signalling the direction of the debt trajectory ahead.
Fixed income implications: Political uncertainty has increased pressure on French government bonds (OATs), with the OAT-Bund spread widening to around 80bps. Volatility in spreads, and a 20-25 basis points ‘political risk premium’ versus its fair value now priced in, are likely to persist until political clarity improves, though the French government bond market enters this phase from a position of relative strength amid high liquidity and the ECB’s accommodative stance.
Equity market implications: The French equity market reacted negatively to the Prime Minister's confidence vote announcement, triggering profit-taking in domestic stocks like financials, which had outperformed in recent months. However, with political risk largely priced in and over 80% of French stock revenues generated internationally, previously impacted international names could help stabilise the market. More broadly, European equities continue to offer relatively attractive valuations compared to the US, presenting opportunities to strengthen exposure during any market pullback, particularly in long-term thematic areas.
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