PARIS: French bonds and stocks stood firm on Monday (Tuesday in Manila) in the face of a government collapse, and German markets were also in good form while London markets were closed for a holiday.
Markets were supported by an assurance from the ECB that it would counter deflationary pressures, and a hint from the US Federal Reserve that rates in the world’s largest economy may rise sooner than expected.
France, already on the back foot because of sluggish economic activity which has just forced the Socialist government to halve its growth outlook for the year to 0.5 percent, was hit by a new political crisis as markets opened.
President Francois Hollande told Prime Minister Manuel Valls to form a new government, and Valls immediately offered the resignation of his administration.
The upheaval was triggered by a weekend speech by Economy Minister Arnaud Montebourg, who attacked French, German and European Union austerity policies.
But despite this political shock, which would normally be expected to weigh down French stocks and push up bond yields, the French markets were buoyed by comments from the head of the European Central Bank, Mario Draghi.
European stock markets made up for last week’s disappointing end, with Frankfurt’s main DAX index finishing up 1.83 percent to 9,510.14 points.
In Paris the CAC 40 rose 2.10 percent to 4,342.11 points, its highest finish since July.
By early afternoon on Wall Street, the Dow Jones Industrial Average had climbed 0.48 percent to 17,083.32 while the tech-rich Nasdaq Composite Index was up 0.42 percent to 4,557.53.
The broad-based S&P 500 firmed up 0.53 percent at 1,998.93 points after topping the 2,000 mark for the first time.
The interest or yield indicated by French 10-year bonds already issued and traded on the secondary market fell to 1.309 percent.
At brokers Credit Agricole CIB, economist Frederik Ducrozet said that the fall in the French bond yield could appear “counter intuitive”, given the government crisis.
But the market was focused mainly on “comments by Mario Draghi,” he said.
ECB moves eurozone markets
Draghi expressed confidence on Friday that actions the bank had already taken, including record-low interest rates, were enough to ward off any threat of deflation in the eurozone.
But he also reassured markets that the bank would ensure deflation—a dangerous cycle of falling prices, which can stifle growth—did not take hold, implying a possible injection of funds into the eurozone economy.
This pushed down eurozone bond yields, in some cases to record low levels.
The yield on the 10-year German bond, the benchmark for the eurozone, fell to a record-low level of 0.944 percent before recoiling slightly to 0.947 percent. The Italian 10-year yield to 2.467 percent.
The yield in Spain fell to 2.254 percent and for Portugal to 3.026 percent.
The euro fell to $1.3199 from $1.3241 late on Friday, and to 137.24 yen from 137.60.
On Friday the head of the Federal Reserve Janet Yellen said that if the US employment market continued to strengthen at the current rate, the Fed might raise its interest rates sooner than investors had been expecting.
This attracted funds into the dollar, which rose to 103.97 yen from 103.87 late on Friday.
The euro was also undermined by a run of weak economic figures for the eurozone last week.
At Natixis bank in Paris, strategist Nordine Naam said that “the resignation of the French government is adding to a negative European climate, even though this is a marginal issue since it has not affected the euro”.
But Barclays struck a more positive note, saying the new government would result in “no change in economic strategy, and probably accelerate the pace of reforms, which would be more than welcome given the current state of the French economy”.
Sterling rose against the euro to 79.59 pence and against the dollar to $1.6581.
The Swiss franc firmed to 1.2089 francs against the euro, but slipped to 0.9159 to the dollar.