Breaking: France Imposes Curfews After Riots, Yield Hits 4.9%, Euro Slips

Protests over the rising cost of living and poor public services in France escalated into riots and looting in several cities over the weekend. Reuters described it as some of the worst unrest in years. The Guardian cited the Interior Ministry as saying nearly 2,400 people were arrested, while Anadolu reported that about 1,000 police officers, gendarmes and firefighters were injured.

On Monday 19 Oct, Prime Minister Sébastien Lecornu ordered regional prefects to impose partial curfews in affected areas and did not rule out declaring a state of emergency, according to Reuters and City AM. The government is also preparing support measures for damaged shops, and Carrefour’s CEO said the damage from the protests could reach tens of millions of euros.

Markets worry the unrest will make it even harder for France to pass a deficit-cutting budget as politics shifts into campaign mode ahead of next year’s presidential election. Reuters reported that France’s 10-year government bond yield rose 13bp to around 4.9% intraday, the biggest one-day rise since late September, moving back toward the 4.99% reached in early October, the highest since 2002. The yield spread over German Bunds widened to about 146bp, and Italy’s 10-year yield rose about 11bp in sympathy, while Trading Economics showed an end-of-day reading of 4.93%, up about 15bp.

In equities, the CAC 40 closed at 7,868.05, down 1.11%, underperforming the rest of Europe, with BNP Paribas and Societe Generale down about 3%. In currencies, the euro (EUR/USD) fell about 0.2% to around 1.1211, lifting the dollar (DXY) to around 102. Hank Calenti, a strategist at SMBC, told Reuters that the post-weekend selloff shows hopes for reform are fading.

The first question is whether the situation calms after the curfews, or whether the government will need to declare a state of emergency. Next comes Friday 23 Oct, when Moody’s is scheduled to review France’s credit rating. A downgrade could add pressure on French bonds, although Commerzbank analysts expect a limited impact on the yield spread.

For the euro, analysts surveyed by Reuters said the euro would only come under heavier selling if tensions spread across the eurozone, and that EUR/USD direction still depends more on how the Fed and ECB respond to oil prices. Andrew Kenningham of Capital Economics warned that France appears headed toward a fiscal crisis that could spread, but contagion risk is still far lower than in the 2010s. The Fed meets on 27–28 Oct; see the latest rates at central bank rates page and our Economic calendar this week