A look at the day ahead in European and global markets from Rae Wee
France finds itself in the depths of a political crisis once again as it cycles through five prime ministers in 21 months – hardly good news for any investor looking to park money in Paris.
Markets will likely face a second day of turmoil in Europe on Tuesday after Prime Minister Sebastien Lecornu’s shock resignation. That came just hours after announcing his cabinet line-up, making it the shortest-lived government in modern French history.
French President Emmanuel Macron has tasked Lecornu to hold last-ditch talks with other political parties to try to chart a path out of the crisis, but regardless, the damage has already been done.
French OAT futures were down slightly in the Asian session after bonds tumbled on Monday, and focus will also be on Paris’ CAC 40 index when markets open later in the day.
Rating agencies have already issued fresh warnings about France’s sovereign credit score, while BCA Research has gone as far to say French bonds are “uninvestable”.
France has the largest budget deficit in the euro zone, which is almost double the European Union’s preferred limit of 3%.
The nation’s long-term finances were already vulnerable, and politics has become increasingly unstable since Macron’s re-election in 2022, given the lack of any party, or grouping holding a parliamentary majority.
Over in Japan, the Nikkei notched yet another record high on Tuesday while the yen stayed weak along with Japanese government bonds (JGBs), as investors braced for a revival in big spending and loose monetary policy under Sanae Takaichi, who is set to become the country’s next premier.
A vote in parliament to choose a replacement for outgoing Shigeru Ishiba is expected on October 15, and Takaichi is favoured as the ruling coalition has the largest number of seats.
The slide in the yen caught the attention of authorities as usual, and Japanese Finance Minister Katsunobu Kato said on Tuesday that the government will be vigilant for volatile movements on the currency market.
Meanwhile, a closely watched 30-year JGB auction on Tuesday, which was seen as an early test of investor tolerance for what is expected to be more expansionist spending and monetary policies in Japan, drew decent demand.
That eased some worries that investors might baulk at buying long-dated debt given the fiscal uncertainty, leaving JGBs recovering some of their losses in the wake of the auction and sending yields lower.
Key developments that could influence markets on Tuesday:
– French politics
– Fed’s Bowman, Bostic, Miran and Kashkari speak
(Editing by Sam Holmes)
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