French Markets Suffer As Political Instability Threatens Budget

Market Update

01.12.2024

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What happened last week?

US

The president-elect promised tariffs on goods from Canada, Mexico, and China.
A key inflation index cast new doubt over how fast interest rates might fall.
A new proposal would make millions more Americans eligible to receive weight-loss drugs.

Japan

The Japanese yen was boosted alongside expectations of a December interest rate hike.

Why It Matters

The president-elect said the US would impose 25% tariffs on all goods from Canada and Mexico, and an additional 10% levy on stuff from China. The news shook up markets – sending automakers’ shares especially lower. Car makers from the US and elsewhere have built extensive factories in Mexico to take advantage of cheaper labour costs. The news provoked wider jitters too: tariffs generally spark an increase in inflation -– which, in turn, results in higher interest rates. That’s likely to slow US and global growth, creating key risks for stocks in 2025.

US consumer prices rose 2.3% in October, compared to the 2.1% the month before, according to the Federal Reserve’s (Fed’s) preferred inflation gauge. The acceleration could inspire some added caution among the central bank’s policymakers in December as they debate another possible interest rate trim. With the US economy still on relatively strong footing and its job market still robust, the market is betting on a go-slow approach from the Fed.

Millions of overweight Americans on Medicare or Medicaid would be eligible for popular weight-loss drugs like Ozempic, Wegovy, and Mounjaro. The drugs – made by Denmark-based Novo Nordisk and US-based Eli Lilly – cost nearly $1,000 a month. According to estimates, the proposal could cost taxpayers about $35 billion over the next nine years. Still, it could be well worth the expense, as obesity causes other conditions that cost tens of billions to treat.

Japan’s currency, the yen, rose almost 3% against the US dollar last week, on expectations that the Bank of Japan would likely hike interest rates in December to cool the country’s overly warm inflation. This is because higher interest rates make a currency more attractive for international savers and investors. The jump in expectations also gave financial stocks a boost, because profits for banks and insurers tend to grow when rates rise.

The Focus This Week: French Markets Suffer As Political Instability Threatens Budget

France's political atmosphere is mired in turbulence, with the far-right National Rally backing a no-confidence motion against the government's budget plans. This instability has sent ripples through French markets, with the CAC 40 index down 1.2%, significantly impacting banking and insurance stocks.

The euro hasn't been spared either, dropping 0.69% to $1.0525, following a tough November. Investor concerns over France's stability are increasing, as reflected in rising borrowing costs now exceeding those of Greece. The widening gap between French and German 10-year bond yields to 86.5 basis points highlights this unease. While Standard & Poor's has maintained France’s debt rating for now, they've hinted at a potential downgrade if fiscal issues persist.

Why should I care?

For markets: Political ripples in the financial pond. The political strife in France is unsettling financial markets, prompting cautious investor behaviour. The decline of the CAC 40 and the euro underscores immediate concerns. The unexpected rise in France's borrowing costs over Greece's suggests a significant confidence shift. Investors should monitor how these political tensions might further impact European markets and possibly ripple beyond.

The bigger picture: European fiscal balance on edge. France's situation highlights the broader fragility in Europe's fiscal environment. The bond yield spread between France and Germany recalls levels from the euro crisis, questioning the eurozone's stability. With potential downgrades looming, Europe's fiscal policies are under scrutiny, raising concerns about the region's economic resilience amid rising national debts and political unrest.

The Week Ahead

Monday: EU unemployment (October), US manufacturing activity (November).
Tuesday: US auto sales (November). Earnings: Salesforce. Modern Investor Summit (day one).
Wednesday: EU producer price index (October), US factory orders (October), US service sector activity (November). Modern Investor Summit (day two).
Thursday: EU retail sales (October), Japan household spending (October). Earnings: Docusign, Lululemon.
Friday: UK house price index (November), US jobs report (November), US consumer sentiment (December), China CPI (November).

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