France has been plunged into a political crisis, the question now is, will it trigger a crisis for financial markets? Late on Wednesday, the French government lost a no-confidence vote linked to its budget. This was widely expected, and it leaves France rudderless at the same time as its budget deficit has swelled to 6% of GDP. In the immediate term, the President will need to appoint a new PM, however, we could be in a situation where any new PM will face the same challenges as Barnier if they try to pass a budget that contains measures to bring down the budget deficit.
The crisis is ostensibly over the Budget; however, it was precipitated by June’s election, which resulted in no clear winner and a fractured parliament. France cannot hold another parliamentary election until next summer, however, Marine Le Pen has made it clear that she is the Kingmaker. After the vote she said that her party will work with the new government to pass a budget. However, that will likely mean far fewer tax hikes and spending cuts, which may not do much to dent the budget deficit.
The market reaction has been muted so far. EUR/USD is climbing once more on Thursday and is testing $1.0530. French bond yields were also stable ahead of Wednesday’s vote, and the French – German yield spread is currently at 83bps, close to the 2012 high, but it has fallen back slightly before the vote. Since the government was not expected to win the vote, we don’t think that we will see a large readjustment in French bond yields just yet.
French bond markets: risks build for 2025
So why are French bond markets likely to remain calm? We think that the big risks for France are building for 2025. If the next set of budget data shows a growing deficit, then the market could get spooked, as a technocratic government may not have the mandate to rein in spending and hike taxes. Added to this, if Marine Le Pen et al are building up to a new election in 2025, will they really want to spook the bond markets? Although she has firmly established herself at the heart of the French government, there are limits to the spending that she can propose, and the bond market could keep her restrained.
Thus, although the future for France is uncertain, there is hope that 1, a budget can be passed and 2, the bond vigilantes may force French politicians to limit their spending plans. President Macron will address the nation later tonight. He is not expected to resign, but his speech could lay out how he plans to form a government and pass the budget before ethe 2025 deadline.
Powell rules out 50bp rate cuts
Elsewhere, the Fed chairman Jerome Powell was speaking on Wednesday night, and although he said that economic strength gives the Fed the ability to take its time on rate cuts, the market has increased bets on a rate cut later this month to 77%. Powell did not comment directly on the chances of a rate cut in December, but instead said that the economy is stronger than it was in September, which effectively rules out further 50bp rate cuts. Powell also said that he hoped to have a fruitful relationship with the President elect when he comes to power next year, he also said it is too early to say how Trump’s policies will impact the economy. Big cap stocks continue to lead the US market rally this week; however, rate cuts and a strong economic outlook should keep the Russell 2000 on the front foot as we move through December.
Crypto cracks $100,000 as new SEC pick gets the thumbs up
Crypto is definitely on top this morning and is back above the $100,000 mark after Trump picked Paul Atkins to run the SEC. Atkins served in the SEC under Bush, when he had a history of opposing regulation and was considered supportive of financial markets. He could revise or reverse changes that were made during the Biden-era. Also, he is unlikely to be as anti-crypto as his predecessor Gary Gensler. Thus, politics is driving bitcoin. We doubt that the rally will stop here, and instead the break above $100k, a psychologically significant level, could herald a new phase of the Bitcoin bull market. BTC has also traded with the tech trade, so we could see gains for the Nasdaq later today. It is also worth saying that the surge in crypto is sucking up market liquidity. This could impact other asset classes, especially under-performing stock markets across Europe. This is a theme that is worth watching.
Stock markets were mixed in Asia, with Japanese markets up slightly, however the Hang Seng fell more than 1%. European futures are pointing to a slightly higher open. We think that stock markets could be directionless later today as we wait for payrolls on Friday.
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