In August, France’s services PMI improved slightly to 49.8, up from 48.5 the month before, but still below the growth threshold of 50.0. The composite PMI also stayed at 49.8, indicating ongoing stabilization, with both services and manufacturing sectors experiencing slower declines. The French services sector remains weak, with ongoing drops in business activity and orders. There was a decline in international customers, but backlogs increased due to staff shortages and customer delays. Good news came in August, as workforce numbers saw their first increase since last November after eight months of cuts.

Price Trends and Business Outlook

Price trends showed only slight rises in input costs and output prices, suggesting a stable but stagnant demand. Business expectations are still below the long-term average, likely impacted by upcoming political uncertainties. Prime Minister Bayrou plans a confidence vote on an austerity budget, and any political instability could affect the fragile economic recovery. Despite these challenges, some signs point to stabilization in the French economy, though caution is necessary due to the broader uncertainty. The latest economic data indicates that conditions are improving, but real growth has yet to materialize. With the services sector PMI at 49.8, just under the growth mark, the extreme pessimism seen earlier this year seems to be fading. This hints that shorting French markets aggressively may not be as profitable as it was a few months ago. Looking at Europe, France’s stabilization stands out, especially while other major economies, like Germany, continue to struggle. We might consider strategies that favor French assets, such as going long on CAC 40 futures and shorting the German DAX. This pair trade could profit if France continues to outshine Germany. However, the most significant factor now is the upcoming confidence vote set for September 8th. This introduces considerable uncertainty, and markets typically dislike uncertainty. We should expect increased volatility, making it a good time to buy options to protect our positions or speculate on a major market move.

Possible Market Reactions

We recall the market chaos during the snap election in the summer of 2024, when the gap between French and German bond yields widened sharply. A similar situation could happen if the government loses the vote, making short positions in French government bond (OAT) futures an attractive hedge. This would essentially bet on rising French borrowing costs due to political instability. This political risk also negatively impacts the Euro. While economic data is neutral, the possibility of a government crisis in the Eurozone’s second-largest economy is a significant concern. We should be cautious with large long positions in the Euro against the US Dollar or Swiss Franc heading into the vote. The European Central Bank will likely see this data as a reason to maintain the status quo. With stable inflation pressures and fragile economic activity, they will probably keep interest rates steady, as they have for several months since their last cut in late 2024. This steady ECB policy might support markets, but it won’t be enough to prevent a political crisis. Given the mix of slightly improved data and high political risk, strategies that could benefit from a sharp price swing are worth considering. Buying a CAC 40 index straddle using options expiring after the vote would allow us to profit from significant moves in either direction. This way, we won’t need to predict the outcome of the political situation—just that it will lead to a strong market reaction. Create your live VT Markets account and start trading now.

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