Investors are being warned to avoid banks, telecom firms, and other domestic-facing companies in France as political risk takes center stage. Prime Minister Sebastien Lecornu, who had been in office for only 27 days, resigned on Monday just hours after naming his new cabinet. His abrupt exit came after heavy criticism of the government lineup. This resignation has embedded political instability into France’s investment scene and raised concerns about the country’s fiscal path . The nation’s large budget deficit already makes it a tough place for traders looking for equity market opportunities in Europe. Populists from both the far-left and far-right now control over 50% of France’s parliament. According to him, any attempts to fix the deficit will likely focus on higher taxes rather than cuts to welfare. Those measures would target companies instead of consumers. That would directly affect French banks, infrastructure firms, and telecom providers. Markets react as political deadlock deepens Kevin Thozet, a member of the investment committee at Carmignac, said, “France [is] being held back by political instability while Germany is supported by its stimulus plan and Southern Europe is buoyed by EU funds.” On Tuesday morning , France’s CAC 40 index showed a slight gain, recovering from the previous day. French 10‑year bond yields rose 0.013 points to reach 3.5821%. Yet bank stocks moved lower. BNP Paribas fell 0.9%, Societe Generale lost 1%, and Credit Agricole dropped 0.6%. Orange, the country’s major telecom operator, traded down 0.2%. Mabrouk Chetouane, head of global market strategy at Natixis Investment Management, said instability is “now part of the landscape” in France. “France has thus become ungovernable, much like Italy a few years ago, when the constant change of governments became commonplace,” Chetouane said. Chetouane added that with presidential elections not due until at least 2027, the country is avoiding immediate distress. “Investors are passively following the twists and turns of French politics, trying to separate the noise from the signal,” he said. On Monday evening, President Emmanuel Macron gave Lecornu 48 hours to break the deadlock with rival parties. If he fails, Macron may be forced to appoint a fourth prime minister since dissolving parliament in June last year. Chetouane called another dissolution a “perilous path” that would add uncertainty for investors and weaken an already fragile economy . Bond strategists split on election risk and spreads Thozet warned that unless the next prime minister is a technocrat able to convince the French electorate of the need for deficit control, the budget gap will stay between 5.5% and 6%. He called this “not a good omen for the French OAT‑German Bund spread.” Goldman Sachs and Citigroup now hold opposing views on French bonds. Goldman strategists, including Simon Freycenet said near‑term election risks “have largely been pre‑empted” by market pricing after Monday’s bond selloff triggered by Lecornu’s resignation. That selloff pushed the risk premium to own France’s 10‑year debt over Germany to the highest level this year. Citigroup’s strategist Aman Bansal warned that rising election risks are “only starting” to be reflected in spreads. He estimated about 14 basis points of political risk premium at current levels, below the 20 basis points reached in August. He said that level is likely to be exceeded if a snap election is called. These diverging views underscore the challenge of trading French bonds after Lecornu’s resignation. The former prime minister had struggled to produce a draft budget acceptable to opposing parties. He was the country’s fifth premier in two years. President Macron has now given him until Wednesday night to negotiate with political leaders in a last‑minute effort to stop a deeper crisis. It is unclear what will happen if he fails. Macron could call fresh legislative elections. Goldman still targets a year‑end spread of 70 basis points for the France‑Germany 10‑year yield gap, “albeit with upside risks.” That implies a possible bond recovery, since the spread is currently around 86 basis points. Simon Freycenet said much weaker growth or a worsening fiscal outlook would challenge that view. Lecornu’s resignation also means the government may miss its October 13 budget filing deadline, which could force emergency steps to avoid a shutdown in January. The standoff has already blocked efforts to reduce what has become the largest budget deficit in the euro area. Get $50 free to trade crypto when you sign up to Bybit now
