The euro fell to a 17-month low against the US dollar at the start of the week, as fiscal and political risks in Paris and Madrid revived memories of the eurozone debt crisis.
The euro touched $1.1161 during Asian trading, after four consecutive weekly losses, and stood at around $1.12 at the European open, recovering slightly.
Analysts at Dutch bank ING warned in a note on Friday that the market could “easily add another 2% in risk premium to the euro” if the bond sell-off extended.
The spread between French and German 10-year bond yields stands at roughly 146 basis points, after the largest weekly increase in 17 years last week, according to data provider LSEG.
France’s 10-year yield rose to 4.917% in early trading on Monday, close to last week’s 24-year high, after closing Friday at around 4.856%.
French Finance Minister Roland Lescure insisted last week that France remained a solid borrower, unveiling a 2027 budget that aims to cut the deficit from 5.4% of GDP to 5%, ahead of next spring’s presidential election.
Spain added to the political uncertainty on Monday, when Prime Minister Pedro Sánchez called a snap general election for 29 November, after the parliament rejected two of his minority government’s housing decrees on Friday.
Spain’s 10-year yield was mostly steady between 4.07% and 4.09% on Monday morning, leaving its premium over German debt at around 65 basis points, less than half of France’s current gap.
Against this backdrop, European stocks were mixed at the open.
The Euro Stoxx 50 fell 0.4%, and the broader Stoxx 600 rose 0.6%.
France’s CAC 40 fell more than 1%, while Spain’s IBEX 35, which slipped into the red after Sánchez’s announcement, was 0.4% higher.
Meanwhile, Germany’s DAX, Italy’s FTSE MIB, the UK’s FTSE 100 and the Netherlands’ AEX traded between 0.1% and 0.3% higher.
Contagion fears test the ECB
Last week’s sell-off also hit Italian, Belgian and Greek bonds, while German debt drew safe-haven demand. Italy’s premium over Bunds neared 110 basis points on Thursday.
Analysts at Belgian bank KBC wrote in a note on Monday that there had been “clear contagion towards the likes of Belgium or Italy” since then.
The turmoil leaves the European Central Bank in a bind.
It has raised rates twice since June to tame inflation, which hit 3.8% in September, but traders have pared bets on more hikes.
Its Transmission Protection Instrument, a bond-buying backstop created in 2022, has never been used.
Speaking at a think tank event on Thursday, Joachim Nagel, head of Germany’s Bundesbank and a likely candidate for the ECB’s next presidency, said the central bank’s focus was price stability, not “certain spread levels”.
Asked about France, ECB President Christine Lagarde told French daily La Croix last week that “when your debt is close to 120% of GDP and not on course to be brought under control, it’s a serious matter”.
However, Lagarde asserted that “it’s not 2008 or 2011”.
Wall Street rallies after weak jobs data
US stocks climbed on Friday after the American economy added just 29,000 jobs in September, far fewer than expected, prompting traders to pare bets on a Federal Reserve rate hike in October.
The S&P 500 rose 0.7%, the Dow Jones Industrial Average 0.5% and the Nasdaq Composite 1.2%.
US futures were mostly flat on Monday, except for the Nasdaq-100, which was about 0.5% lower.
The minutes from the Fed’s September meeting are due on Wednesday.