France has stepped into a crisis mode after a series of events - that included budget concessions to make Le Pen happy - ended with Le Pen not being happy. Consequently, Barnier used a constitutional tool to push his unpopular budget bill without a parliamentary vote and Le Pen said that she would take his government down by joining the leftists in a no-confidence motion. In summary, things will probably get messier in France before they get better.
Interestingly, the market’s reaction to the latest drama was lighter-than-I-would-expect for a country that risks losing its hardly-funded government in the next days, and risks a potential government shutdown in the coming weeks. The French 10-year yield fell to the lowest in two months and the CAC 40 closed the session near flat. But wait, the spread between the 10-year French and German yields jumped to 87bp – the highest since the euro debt crisis of a decade ago, and could well spike above the 100bp mark if the French political crisis is not contained. The widening French-German yield spread hammered the single currency on Monday.
The EUR/USD sharply dropped to 1.0460 and will certainly remain under the pressure of the French drama – among other problems on the continent. Stellantis (NYSE:STLA) CEO quit yesterday on tumbling sales and profit causing the shares to drop more than 6%, and around 66’000 VW workers abandoned their posts on failure to agree how to slash costs to avoid factory closures. Selloff in VW shares remained curiously limited.
PS: Crisis equals opportunities that will allow some investors to buy French, and broader European assets at discounted prices. So next weeks will be about watching and chasing a dip for many investors. The widening valuation gap between the US and European equities looks interesting for those who believe that the two continents can not diverge forever.
What Happens in Europe Stays in Europe.
The S&P 500 printed this year’s 54th record high on Monday, as record Black Friday sales came as another proof that Americans continue to spend.
Nasdaq 100 jumped more than 1% to near an ATH. Intel (NASDAQ:INTC) gained and erased gains on news that its CEO was forced to retire on failure to turn the company’s fortunes around and watch the competition eat into its market share.
All eyes are on what the new CEO will do with the foundry business. Intel could spin it off to better compete with Nvidia (NASDAQ:NVDA) – which only designs its chips and lets the others build. But the company’s foundry business could be a good source of revenue and give Intel a competitive advantage within the ‘America First’ narrative
In the FX, the USD index rose as the euro sold off sharply and Trump warned BRICS against replacing the US dollar by a common currency.
The USD/JPY tested the 100-DMA support, near 149, to the downside but rebounded back above the 150 level. The bets that the Bank of Japan (BoJ) could announce another rate hike before the year-end keeps the yen bulls alert, but levels below 150 may be too enthusiastic provided the BoJ’s potential to deliver a dovish hike that would limit the yen’s appreciation.
In the bonds space, the 10-year JGB yield is pushing higher and the euro 10-year yield is pushing lower on expectation that the European Central Bank (ECB) must cut more-than-otherwise to contain the French crisis and to give support to the struggling European economies amid slow growth and a growing tariff threat from the US. The latter should continue to support a further downside in the EUR/JPY.
In the US, the 2-year yield consolidates near the 4.20% mark, and the probability of a 25bp cut from the Federal Reserve (Fed) in the December meeting is up to almost 75% after the Fed’s Waller said that he would back a 25bp cut in the December meeting. For those who are still interested – and think that the data is worth something in the Fed’s decision-making – the US announced a set of better-than-expected PMI numbers yesterday and is expected to print higher job openings for October and better optimism for December. Strong data should – in theory - tame a part of the dovish Fed expectations, but the market wants to see another 25bp cut from the Fed in December and the Fed is happy to align. Whether it will limit the USD’s upside potential remains uncertain, but with strong data, it seems unlikely.
In energy, US crude gave back the early week gains yesterday, as the failure to clear the $70pb offers brought in the top sellers near this level. The downside potential should be limited and price rebounds could be expected on hope that OPEC would delay – or even scrap – its plans to restore production in early 2025. But OPEC alone could hardly turn around the market. Therefore, price rallies will continue to offer interesting levels to strengthen medium-term bearish positions.