Markets
News agency Reuters reported just before the start of European trading that Russian President Putin would be open to talks on a ceasefire deal in Ukraine with the US. He wants a carve-up of four regions in the south—east of Ukraine that Russia annexed in 2022, but doesn’t fully control. It caused a positive start on stock markets, rebounding somewhat after yesterday’s geopolitical escalation (Putin’s signing of updated nuclear doctrine). Ukrainian President Zelensky reiterated in response that his country won’t make concessions on sovereignty or territory. Main European equity indices currently gain around 0.50%. Hotter-than-expected October UK CPI data served as a reminder that the government’s fiscal booster severely ties the Bank of England’s hands. Headline inflation rose by 0.6% M/M to 2.3% Y/Y (from 1.7%). Core CPI accelerated to 0.4% M/M (3.3% Y/Y from 3.2%). Goods prices rose by 0.8% M/M (-0.3% Y/Y from -1.4%) and services costs by 0.4% M/M (5% Y/Y from 4.9%). UK money markets barely discount a cumulative 50 bps of additional rate cuts over the next 9 months. UK Gilts sell-off today, but do so in a bearish steepening instead of flattening fashion. UK yields add 1.2 bps (2-yr) to 7.1 bps (30-yr). Sterling is slightly stronger at EUR/GBP 0.8330. The ECB’s Q3 negotiated wage data were today’s sole other date point of interest. Wage growth accelerated from 3.5% Y/Y in Q2 to an EMU record high of 5.4% driven by a 8.8% increase in Germany (quickest since 1993). Wage inflation adds to stronger-than-expected Q3 GDP growth and more sticky price pressures in October. Investors continue reducing 50 bps rate cut bets by the ECB at its December policy meeting. ECB vice-president de Guindos confirmed that prudence is needed. Current projections don’t show a risk of undershooting the 2% inflation target. The impact on the overall European bond market could have been possible bigger if it weren’t for the lingering geopolitical event risk. Ukraine now also firing UK long term missiles (Storm Shadow) is a point in case. German yields add 2.9 bps (2-yr) to 4.3 bps (10-yr). EUR/USD dips from 1.06 to 1.0550.
The Flemish Community today tapped its outstanding 3.125% Jun2034 benchmark for €1bn (books above €8.3bn). The deal was prices at 24 bps over the Belgian OLO curve (vs guidance at OLO+28 bps area). Flandres now raised €3.75bn YTD via regular benchmarks, the upper end of the targeted €3.25-3.75bn in its funding plan. A sustainable benchmark (€1.25bn raised vs €1.25-1.50bn target) and €0.25bn in EIB funding (target) are this year’s other long term funding sources so far. No private placements (€0.75-1bn) have been done so far. The total amount raised (€5.25bn) compares with a €6.55bn target. Next year, Flanders is looking at around €5bn in new long-term funding.
News & Views
The ECB in its biannual Financial Stability Review highlighted several risks including “rising global trade tensions and a possible further strengthening of protectionist tendencies”. With economic growth now a bigger threat than inflation, the ECB is worried that trade developments may have an adverse impact on (global) growth, inflation and asset prices. Against the backdrop of already tepid growth, it is markedly more explicit about the bloc’s fiscal risks. The ECB pointed to “elevated debt levels and high budget deficits”. In an echo to the sovereign debt crisis around 12 years ago, the ECB mentioned a potential resurgence of market concerns over debt sustainability. The combination of low growth and high government debt makes it more difficult to address other pressing matters such as defense spending and climate-related investments, the central bank said. Other concerns the ECB mentions include high borrowing costs and weak growth dragging on corporate balance sheets, as well as credit risks for SME’s and lower-income households. In a context of “elevated macro-financial and geopolitical uncertainty” a warning was issued for a sudden sharp reversal in certain market segments given high asset valuations.
French far-right leader Le Pen today threatened to topple PM Barnier’s coalition government if her party’s cost-of-living concerns were not addressed by the 2025 budget. She told RTL radio that if the government crosses this “red line”, the Rassemblement National will vote no-confidence. Le Pen said that RN opposes increasing the tax burden on households, entrepreneurs or pensioners and that so far these demands were not reflected. Barnier’s coalition is a fragile one after snap parliamentary elections last summer didn’t produce an absolute majority for any party. The far-left tabled a vote of no-confidence already earlier this year but that failed since it lacked the support of RN. Since the elections, France’s credit risk premium has risen to surpass the one for Belgium, Portugal and Spain.
. Ukrainian President Zelensky reiterated in response that his country won’t make concessions on sovereignty or territory.){kind=link}