London Quick Take – 8 September - Political turmoil on deck ahead of ECB

Political uncertainties and upheaval seem to be the order of the day – Japan's prime minister called it a day, while in France’s PM, the fourth in three years, faces likely defeat in a confidence vote today.

France needs an election – the parliamentary arithmetic just doesn’t stack up. For markets what’s at stake is not just getting the fiscal situation in order, but a broader feeling that the country is not governable. A protest in two days’ time organised by the radical Left will underscore the mood. Fitch delivers a credit rating upgrade on Friday – French bond yields may lurch higher, dragging others up with it. Christine Lagard famously said in 2020 that the ECB was not there to close bond spreads. Last week she said she’s watching “very attentively at the French bond spreads situation”. The ECB is likely to stand pat on rates when it meets this week, but questions over what it might need to do to backstop core economies remain. President Macron needs to gamble on new elections sooner or later and use any financial market turmoil to his advantage.

Financial markets have been moving on these concerns. Japan’s yen fell against peers, which in turn pushed Nikkei 225 stock market index higher. European stock markets have taken the baton and trade higher this morning despite the concerns in France, though the CAC remains about 4-5% below where it was before the mini-crisis emerged in August. Bond yields that had spiked last week for a range of apparent reasons have backed off those highs and look calmer this morning.

Wall Street had closed lower on Friday after a soft payrolls report – just 22k jobs added in August and unemployment ticked up to 4.3%. This cemented the market’s view that the Federal Reserve will cut rates next week. Nevertheless, the S&P 500 and Nasdaq did finish the week with a gain, while the Dow Jones fell.

Gold keeps delivering – no doubt that the possibility of the Fed’s independence being at stake and erosion of confidence in the US and the dollar is keeping momentum behind it. Meanwhile, the soft jobs report on Friday has boosted market pricing for rate cuts, further juicing the long gold trade. US inflation data is due this week.

Ahead of this on Tuesday the Bureau of Labor Statistics releases its annual benchmark revision that is expected to show the economy shed as many as 1 million more jobs between April 2024 and March 2025 than previously estimated. This ought to further bolster the case for the Fed to cut rates – the only question is how far away do they feel they are with inflation?