French-German Debt Spread Surges to 12-Year High Amid Political Uncertainty
The French-German sovereign debt spread surged to over 150 basis points last Friday, marking its highest level since the Eurozone debt crisis in 2011. This spike reflects growing concerns about France's ability to manage its annual budget and prevent a deficit expansion to 6.5%. With a divisive presidential election scheduled for April, the political landscape is tense, and the required spending cuts appear difficult to implement.
The euro has weakened to near 18-month lows against the dollar, as markets reduce expectations for another European Central Bank (ECB) rate hike by year-end. While ECB intervention in bond markets is not yet anticipated, traders are closely monitoring the impact on other eurozone government debt spreads. Meanwhile, Spanish Prime Minister Pedro Sanchez announced a snap election over housing reform issues, adding to the political uncertainty in Europe.
In the U.S., the September payrolls report showed a smaller-than-expected increase of 29,000 jobs, with prior months revised downward. The unemployment rate ticked up slightly due to more people entering the job market. These figures reduced the likelihood of a Federal Reserve rate hike this month to around 20%. The G7's decision to release 100 million barrels of diesel and crude oil helped stabilize energy prices, contributing to a slight easing of Treasury yields.
Investors are seeking safety in German bunds or the Swiss franc, which surged against the dollar and euro late last week. French bank stocks have been under pressure, but broader European equities have held up, possibly due to the weaker euro and reduced ECB rate hike expectations. Brazilian markets are also bracing for volatility following the first round of presidential elections, where right-wing candidate Flavio Bolsonaro advanced to the runoff against incumbent Lula da Silva.