[MARKET ANALYSIS] French assets underperform into busy weekend of French politics

• Weakness in French assets today is attributed to concerns over political instability into the first French presidential debate (begins at 15:45 BST), alongside the Socialist party set to unveil 2027 budget demands this weekend.

• Presidential Debate: Features seven candidates, the three favourites Marine Le Pen (far right, RN), Jean-Luc Mélenchon (far left, LFI) and Édouard Philippe (centre-right, Horizons), in focus. Mélenchon was in focus recently after calling for the ECB to waive interest payments on its debt holdings, while Le Pen does not appease markets either given friction with Brussels and past market moves on her resurgence.

• Focus also on Budget Negotiations: Due late September with the Socialist party set to unveil demands on the weekend, the PM needs to conjure significant budget cuts after ruling out new taxes for 2027. A budget would be needed before the presidential election or require emergency legislation to continue spending into the second half of next year. Analysts estimate the deficit could reach 5.6% next year without any action - the current target is 5%.

• Polling: Polymarket shows a Le Pen victory as the most likely outcome, assigning 33%, Philippe at 25%, Mélenchon at 15%. Kalshi probabilities see 37%, 21% and 16%, respectively. A Toluna Harris poll published on Monday showed Mélenchon scoring well enough in multiple scenarios to defeat centrist candidates and qualify for the runoff where he would face Le Pen.

• Credit rating updates: Fitch are set to review France’s rating, last time was A+, stable, analysts expect it to be reiterated.

Episodes of French political stress have a well-worn template: the transmission runs through the OAT-Bund spread rather than through Bunds themselves, with French banks and domestically exposed equities underperforming the broader euro complex while core rates often benefit from the same risk bid. The precedent from prior election and budget scares is that widening tends to be sharpest when uncertainty is binary and unresolved, and to retrace partially once the event risk passes without a market-hostile outcome, so the debate and the weekend Socialist budget demands are the kind of discrete catalysts around which the spread has historically gapped and then mean-reverted. The actors matter here: both the far right and far left carry form as spread wideners, one through friction with Brussels and the other through fiscal expansion and challenges to ECB orthodoxy, while a centrist outcome has historically been the tightening scenario. The budget arithmetic is the slower-burning channel, since France's deficit trajectory and the loss of budgetary room have already been the subject of ratings scrutiny and EU fiscal procedure, and a government unable to pass a budget before the election raises the prospect of stopgap financing. The near-term calendar is dense: the debate, the weekend demands, the late-September negotiations, and the Fitch review, with the spread's behaviour into each the established tell for whether this remains a contained political premium or broadens into a credit story.