Banks in France could collapse because ‘widening riots can cause deposit flight,’ analysts warn

Macquarie warns of bank risks in France

We’re not there yet, but some on Wall Street think France’s rising government bond yields, coupled with the riots, may undo certain French banks, leading to foreign depositors pulling their money out of the country.

For days, student protesters and unions have marched in the streets and clashed with police over conditions in dilapidated French schools. Pupils often complain of overcrowding in classrooms, lack of heating in winter and lack of air conditioning in summer.

Macquarie analysts Thierry Wizman and Gareth Berry have argued in a series of notes that if the rioters successfully persuade the government to increase education spending, French bond yields will rise.

“We can easily see how further increases in sovereign bond yields and/or widening riots can cause deposit flight,” they warned in a note to clients yesterday. “It was, after all, the rapid rise in bond yields in the U.S. in late 2022 and early 2023 that resulted in the liability-side collapse of Silicon Valley Bank and Republic Bank, as well as programmed liquidity interventions from the Fed for the banking system overall. More generally, rapid increases in bond yields have been associated with financial collapses in the past, and there is no obvious reason to believe that Europe's financial institutions—especially France's institutions—would be immune from the rapid rise in yields taking place there over the past few months.”

“The rise in underlying yields may be associated with capital fleeing from France. And if this extends to deposit flight from its commercial banks, then the prospect of an ECB intervention - say, using programs specifically directed at preserving bank liquidity, such as its refinance operations,” could be a possibility, they said.

Context: They also said there is currently no sign of this happening.

Tech stocks and global markets react

Tech investors lost their nerve in Asia today as shares in chipmaker SK Hynix fell more than 10% and Samsung fell 7.39%. In the Netherlands, ASML was down 1.48%. Their fear was driven in part by remarks from Broadcom CEO Hock Tan, who said at an event in Singapore yesterday that “A lot of investors have no clue what they are investing in [and] set very extreme expectations only to find out that it’s almost like they are in a casino.”

He said a lot of AI customers were “wasting money” on tokens as they experimented fruitlessly to find ways to improve their productivity. “When you are a kid, you go to a video arcade, you play. Your parents give you $10 of tokens, you finish it in 10 minutes and you haven’t learned anything,” he said. “That’s what is happening in enterprises today.”

Markets in Europe were more resilient and U.S. futures were flat before the open.

S&P 500 futures were marginally up (0.02%) this morning. The index closed flat on Friday. In Europe, the Stoxx 600 was up 0.58% in early trading, and the U.K.’s FTSE 100 was up 0.7% before lunch. Asia: South Korea’s KOSPI was down 5.46%. Japan’s Nikkei 225 was down 1.82%. India’s Nifty 50 was up 1.02%. China’s CSI 300 was down 0.29%. Brent crude was $105 per barrel. Bitcoin was at $83,586.

Stocks will probably do OK after the midterms, Deutsche Bank says

In the period from one month before the midterm elections to two months after, the S&P 500 has gone up in 21 of the previous 23 midterm years, according to Binky Chadha and Parag Thatte at Deutsche Bank.