BNP Paribas (FRA40:BNP) shares are showing some weakness against the backdrop of a potential government collapse.
BNP – Daily Chart
Shares of BNP trade at 76.19 after a recent slump, but buying volume looks weak. That could see a further move lower toward the 72.63 level.
Citigroup analysts said that French shares were not yet pricing in the potential for a government collapse. Citi’s equity strategy team noted that French stocks are typically more volatile around elections than other markets.
Using historical correlations between French stocks and bonds, Citi finds that the current level of spreads implies a price-earnings multiple for the French index that is two points lower than the present 14.8 times. The report, entitled “French political risks are on the rise again,” states that stocks should be 5% lower, driven by those with the largest domestic exposure: financials, real estate, and communications. Companies in sectors like luxury goods generate the majority of their profits offshore.
Higher interest rates increase the cost of capital for French banks, alongside the risk of punitive measures by a government chasing austerity. Banks appear to be the sector most vulnerable to the political chaos, Citi said.
Next week’s vote of confidence in Prime Minister Francois Bayrou could lead to the collapse of the centrist government and create a period of further instability in the European Union’s second-largest economy.
The vote on Monday in the National Assembly will see Bayrou not only try to secure approval for himself and his government, but also for a deeply unpopular budget of austerity, which aims to cut the budget deficit by 1.5 per cent of GDP next year.
Financial markets were volatile after Bayrou’s announcement on August 26, with yields on France’s 10-year bonds rising to 3.5% on Monday, higher than debt-riddled Greece’s 3.36%. Paris is struggling to remain in control of its spending. France’s budget deficit hit 5.8% of its gross domestic product (GDP). The official EU target is supposed to be no higher than 3%.
French stocks could be volatile in the coming weeks, starting with the vote on Monday.
