French, German markets firm after ECB deflation assurance

French bonds and stocks stood firm on Monday in the face of a government collapse, and German markets were also in good form while London markets were closed for a holiday. Markets were supported by an assurance from the ECB that it would counter deflationary pressures, and a hint from the US Federal Reserve that rates in the world’s largest economy may rise sooner than expected. France, already on the back foot because of sluggish economic activity which has just forced the Socialist government to halve its growth outlook for the year to 0.5 per cent, was hit by a new political crisis as markets opened. President Francois Hollande told Prime Minister Manuel Valls to form a new government, and Valls immediately offered the resignation of his administration. The upheaval was triggered by a weekend speech by Economy Minister Arnaud Montebourg, who attacked French, German and European Union austerity policies. But despite this political shock, which would normally be expected to weigh down French stocks and push up bond yields, the French markets were buoyed by comments from the head of the European Central Bank, Mario Draghi. European stock markets made up for last week's disappointing end, with Frankfurt's main DAX index finishing up 1.83 per cent to 9,510.14 points. In Paris the CAC 40 rose 2.10 per cent to 4,342.11 points, its highest finish since July. The interest or yield indicated by French 10-year bonds already issued and traded on the secondary market fell to 1.309 per cent, according to AFP.