Markets
Outright divergence again reigns between US and European markets as US investors return from the Thanksgiving/Black Friday ‘long weekend’. Political/budgetary developments in France continue to set the tone for trading on European markets. The minority government of French Prime Minister Barnier and Finance Minister Armand is playing hard ball with the Rassemblement National on concessions (less savings) to a proposed budget that aims/aimed to reduce the French budget deficit to 5.0% next year. This morning, the Fin Min Armand warned that he wouldn’t allow his administration to be blackmailed. However, this afternoon, AFP reported Premier Minister Barnier offered a final concession by not cutting reimbursements for medicines next year. Whether this will be enough to avoid a vote of no confidence and/or even more political chaos is still highly uncertain. At least, European markets showed some’ relief’ after the headlines but they could be short-lived. Barnier in the meantime forced through the budget using article 49.3. The Left will propose a motion of no confidence which Le Pen’s party is said to back. German yields are ceding between 4-5 bps across the curve. The German 10-y yield is coming ever closer to the 2% psychological barrier (2.05%). The French-German 10-y yield spread rises to 87 bps. ECB Kazaks in an interview explicitly left the door open for a bigger interest rate cut (still ‘only’ about 15% of a 50 bps cut discounted for next week). US yields in the meantime aborted last week’s correction adding between 7 bps (2-y) and 4 bps (30-y). Maybe Donald Trumps warning to BRICS countries threatening them with a 100% import tariff if they don’t commit to continue using the dollar as financial anchor e.g. by creating a new alternative currency. Maybe the threat at least helped to revive at least part of the Trump-Trade (higher yields and stronger dollar). With the eco data today (Manufacturing ISM) and later this week (ADP, Jolts job openings, services ISM and payrolls later this week) deciding on an extension of the move. DXY at least shows a nice rebound today (106.45 from 105.82). EUR/USD was under pressure from the start in Asian this morning, only temporarily interrupted by the ‘positive’ headlines on the concessions in the French budget negotiations. The pair currently trades near 1.047. Gains of the dollar against the yen today still were negligible on persistent yen strength (USD/JPY 149.9). A bit remarkable, European equities today outperform the US (Eurostoxx 50 + 0.6%, S&P 500 little changed).
At the time of finishing this report, US manufacturing ISM improves from 46.5 to 48.4. At the same time prices paid dropped from 54.8 to 50.3. Other details show no clear trend. Yields show no big reaction. The dollar gains further.
News & Views
The decline in the Czech manufacturing accelerated in November with the PMI drop ping from 47.2 to 46 (PMI <50 boom/bust level since June 2022). Weak domestic and external demand weighed on sales and international orders. Structural issues in the automotive sector and challenges to the German manufacturing economy were often highlighted. Companies cut input buying and reduced stock in response to low orders. They did point at extended supplier delivery times as strikes at ports and capacity issues at vendors. The pace of job shedding did slow to the weakest since March. An uptick in input prices didn’t translate into higher selling prices. Czech manufacturers stay upbeat on output expectations over the coming year, but optimism dropped to the lowest since January. The krone didn’t respond to the weak PMI with EUR/CZK stuck between 25.20 and 25.40 since the start of Q4 2024.
The leader of Hungarian opposition party Tisza ahead of next year’s elections vowed to unlock EU-funds (€20bn), copying Polish PM Tusk’s strategy, and steer the country towards euro adoption. Peter Magyar would as a first step allow the EU prosecutor’s office to probe corruption in Hungary, which has been a major stumbling block and something that Orban has rejected. These blocked funds are one of the reasons why Moody’s cut the outlook on its Baa2 rating from stable to negative last Friday. Magyar added that a new government with predictable economic policies would wintrust of markets if it doesn’t change laws daily or doesn’t seek to penalize foreign investors. It could help lower the country’s risk premium. He would like to have a date for joining the euro area with a predictable FX rate giving stability and predictability for markets, entrepreneurs and Hungarians. There’s no evidence of that yet, with EUR/HUF today testing the YTD top around 415.
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