French-German Debt Spread Surges to Highest Level Since 2011
On Friday, the focus in sovereign debt markets shifted to Europe as the French-German debt risk premium widened significantly. The 10-year French-German spread surpassed 150 basis points for the first time since 2011, reflecting growing concerns about France's ability to manage its budget deficit, which could reach 6.5% without necessary spending cuts. The upcoming divisive presidential election in April adds to the uncertainty, with potential winners from either the far-right or far-left. These political tensions have put pressure on the euro, which dropped to near 18-month lows against the dollar.
Markets are now scaling back expectations for another European Central Bank rate hike by year-end. While broader European equities have held up, some investors are seeking safety in German bunds or the Swiss franc, which surged against the dollar and euro. French bank stocks have been particularly affected by the stress in the debt markets.
In the U.S., the September payrolls report showed a much smaller-than-expected increase of 29,000 jobs, reducing the chances of a Federal Reserve rate hike this month to around 20%. The G7's decision to release 100 million barrels of diesel and crude has helped stabilize energy prices, which in turn has kept a lid on Treasury yields.
Meanwhile, Brazilian markets are bracing for Monday's open after Flavio Bolsonaro's strong performance in the presidential election's first round. He will now face incumbent Lula da Silva in the runoff. Additionally, European countries are rapidly building data centers, nearing 80% of U.S. levels, which could position the bloc as a major player in the AI arms race.