French Fiscal Crisis Drags Stocks Despite Eurozone Business Resilience

European stock markets showed mixed performance on Monday, with French equities facing significant pressure due to an escalating fiscal crisis. The pan-European STOXX 600 index rose 0.4%, attempting to recover from recent losses that had pushed valuations to three-month lows. Major markets like London, Germany, and Italy closed in positive territory, while France’s CAC 40 fell as much as 1.2% to a six-month low, ending the day down 0.8%. The decline was driven by investor concerns over Paris’s 2027 draft budget, which triggered a sell-off in French government debt.

Despite the fiscal turmoil in France, broader European markets found some support from resilient regional business activity. Eurozone PMIs hit a 3.5-year high in September, with the S&P Global Eurozone Services PMI rising to 53.0, its highest level in a decade. The composite index, combining manufacturing and services, also increased to 53.1, marking the bloc’s strongest quarterly performance since Q2 2022. However, rising energy costs pushed Eurozone inflation to 3.8% in September, surpassing the European Central Bank’s 2% target and fueling debate over potential further monetary tightening.

ECB Chief Economist Philip Lane acknowledged the inflation spike but emphasized that a measured policy response remains appropriate. This reassured equity desks that the ECB may avoid overly aggressive tightening. Meanwhile, geopolitical tensions in the Middle East, including a major military campaign by Yemen’s Saudi-backed government and Houthi strikes on energy infrastructure, kept energy risk premia elevated. In political news, Spain’s Prime Minister Pedro Sánchez called a snap election for November 29, though Spanish equities rose 1% despite the uncertainty.

The tentative recovery in European markets was also supported by a shift in global interest rate expectations following a softer-than-expected U.S. nonfarm payrolls report. Money markets now reflect just a 20% chance of an October Federal Reserve rate hike, down from roughly 65% a week ago. This allowed benchmark Treasury yields to ease off multi-decade peaks, providing short-term respite for duration-sensitive equity sectors.