European Markets Under Strain From Widespread Protests

Demonstrations that started in France several weeks ago over poor school conditions have intensified, bringing confrontations with law enforcement, theft, and fires as fuel costs and the cost of living rise.

France's budget deficit hit 5.1% of GDP in 2025, and public debt nearly reached 120%, giving the government limited capacity to help households.

The government is now seeking €54 billion in spending reductions for the 2027 budget to prevent the fiscal situation from worsening, but passing such cuts during social unrest will be difficult.

Protests also occurred in Liège, Belgium, in early October and then extended to other locations in Wallonia and Brussels, as well as to Ireland, Spain, Italy, Germany, Greece, and Austria.

The demonstrations, though mostly peaceful, are exerting strain on European bond markets and the EUR/USD pair.

French long-term government bond yields, for instance, have hit 5.5%, exceeding US yields for the first time since 2013. The cost of default insurance for France has also risen to its highest point since 2013.

Equities in Europe are facing pressure too, as higher energy costs due to the Middle East war, Ukrainian attacks on Russian refineries, and worries about returns on AI investments compound the stress and dampen optimism.

What might soothe the markets?

A solid earnings season.

The positive news is that consensus forecasts indicate 20.7% earnings growth for the STOXX Europe 600, led by energy, technology, and industrial sectors. Elevating gas and oil prices lift energy earnings, while the AI investment surge boosts demand for European machinery and industrial offerings.

Reuters reports that tech earnings could increase by close to 33%, with industrial profits up 11%. Banks may add extra support.

A lot depends, of course, on corporate outlooks for the fourth quarter and 2027, their ability to safeguard margins, and their capacity to turn revenue expansion into cash flow.

Additionally, earnings projections for Q3 have been lifted, making it tougher to surpass forecasts.

However, even if earnings beat expectations, any comfort might be temporary given Europe's unresolved fiscal issues. Inflation threats persist, likely forcing central banks to maintain a hawkish stance, which bodes poorly for the economy and financial markets.