By Aline Oyamada and Julien Ponthus

Bloomberg) -- In a week that saw the collapse of the French government, it wasn’t a bad time to be owning French assets.

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The CAC 40 Index of stocks is about to cap its best week in two months. Bond spreads narrowed, erasing the entire move since Nov. 20, when talk of Le Pen supporting a no-confidence vote surfaced. And the euro has stopped plunging, finding a floor around $1.05.

The moves suggest the panic that has gripped markets is starting to dissipate as investors consider next steps for what’s been an extremely turbulent chapter of French politics. In a deeply depressed market, it often doesn’t take much for prices to bounce. The hint by Marine Le Pen, leader of the far-right party, that it’s possible for the government of overcome the impasse and deliver a budget within weeks was enough to draw in some traders.

“A lot of bad news is likely in the price already, while the potential appointment of a technocrat government in France could raise hope that a 2025 budget will be adopted,” wrote Emmanuel Cau, a strategist at Barclays Plc. “This would prevent the political crisis turning into a financial crisis, and likely provide some relief to the beaten down French domestic and rate-sensitive plays.”

Investors have been tracking the difference between French bond yields and Germany as a measure of the anxiety. A wider spread means that investors are demanding more return in exchange for the risk of owning French assets.

The 10-year bond gap shrunk four basis points on Friday to 74 basis points — or 0.74 of a percentage point, the narrowest since Nov. 20. Last week, the spread reached the widest since the 2012.

Peter Goves of MFS Investment Management says he expects the spread to stay wide given the prospect of months of political limbo.

“Should PM after PM after PM continue to fall, further questions are likely to be raised about how to navigate the political impasse,” said Goves, the head of developed market debt sovereign research. “For now, it’s about who the next PM will be and what that entails.”

Stocks also continued to rebound on Friday. The CAC 40 jumped 1%, outperforming other European markets. It’s rallied for seven straight days and up 2.4% this week.

Macron’s promise to serve out the remainder of his term is also reassuring investors, said Gilles Guibout, head of European equities at AXA IM.

“It’s kind of a relief rally,” he said. “The fact that nearly all the stocks of the CAC 40 are rising strongly suggests that these are investors taking broad bets on France, rather than stock picking the dip”

--With assistance from David Goodman, Sagarika Jaisinghani, Farah Elbahrawy and Constantine Courcoulas.

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