From 48m
ago
08.38
CEST
Introduction:
French bond sell-off 'reminiscent of the euro crisis'
Good
morning, and welcome to our rolling coverage of business, the financial markets
and the world economy.
Turmoil
in the government bond market is reviving memories of the eurozone debt crisis
15 years ago – but this time France is in the firing line.
Concerns
over Paris’s fiscal position are pushing its borrowing costs up, amid a global
sell-off of sovereign debt. This pushed the gap between France and Germany’s
borrowing costs, a key measure of investor concern, to its widest level since
2012.
Yesterday,
the yield on French 10-year government bonds (or OATs) yields jumped to their
highest level since 2002, before dipping back as the bond rout eased.
Investors
are reluctant to eat their OATs due to political uncertainty, with presidential
elections scheduled for 2027, and concerns over France’s public debt which has
climbed to a record high.
Jim Reid,
Deutsche Bank strategist, points out that yesterday the Franco-German 10 year
spread (+13.9bps) saw its biggest daily jump since March 2020 at the height of
the Covid turmoil.
Reid told
clients this morning:
Markets
stumbled yesterday as we began Q4, with mounting signs of financial stress
focused on Europe. In fact, the daily moves were reminiscent of the Euro crisis
in many respects, with sovereign contagion a big talking point.
Inflation
fears are also pushing up bond yields – and at 10am we get the first reading on
how fast prices rose across the eurozone in September.
If that
doesn’t rock the market, then the latest US jobs report might, as pressure
mounts on the US Federal Reserve to consider raising interest rates.
The
agenda
9am BST:
UN’s FAO Food Price Index
10am BST:
Eurozone flash inflation reading for September
1.30pm
BST: US non-farm payrolls employment report
3pm BST:
US factory orders report for August
Updated
at
08.52
CEST
21m ago
09.06
CEST
Lord
O’Neill: letting UK fiscal buffer fall might be 'wisest thing to do'
The jump
in UK borrowing costs in recent weeks to the highest level in many years has
eaten into the ‘fiscal buffer’ which the government created to keep within its
fiscal rules.
That
buffer was £23.6bn back in March, but some economists estimate it could have
halved – even before you account for new spending pledges.
This
means John Healey could face a choice between reporting a smaller buffer (which
increases the risk of breaking the fiscal rules), or lifting taxes to boost
revenues.
Economist
Lord O’Neill argues that Healey should accept the buffer will have to be
smaller, pointing out that we are facing “remarkable circumstances”.
Jim
O’Neill told Radio 4’s Today Programme that this might be the wisest thing to
do, given the huge unpredictability surrounding Donald Trump and the Iran war.
The
situation could be very different by the budget, or a few weeks later, and oil
prices might have dropped, he argues.
As Lord
O’Neill puts it:
Rather
than risking some tax increases in the way previous governments have to just
magically hit some number and keep the buffer bigger, in this instance I
personally suspect it might be the wisest thing to do.
He also
argues that the UK economic situation is somewhat better than some people
realise, pointing out that the economy grew at an annual rate of 2% in the
first half of this year.
39m ago
08.47
CEST
Euro near
17-month low
The euro
is trading close to the 17-month low hit yesterday, when the single currency
fell by over 0.75% to as low as €1.1214.
Ipek
Ozkardeskaya, senior analyst at Swissquote, says jitters about France are
hurting the euro:
The sharp
weakening of appetite for French debt is a big issue for the broader euro area
and the euro itself. France is the euro area’s second-largest economy — we used
to call it the ‘core’, along with Germany, back during the 2012 sovereign debt
crisis!
So, if
concerns spread, other heavily indebted members could also face higher
borrowing costs, tightening financial conditions across the region. For the
euro, that means weaker growth prospects and a growing risk premium. The EURUSD
tanked to 1.1215 yesterday, as the market’s focus shifted from the central-bank
convergence/divergence story towards the euro area sovereign debt story.
47m ago
08.39
CEST
France’s
budget 'offers no quick relief for bond markets'
France’s
government did try to cool the situation yesterday, by proposing a budget for
next year including €43bn in cuts and tax rises.
Under the
proposed plan, the tax burden would rise while spending growth would be slowed
through slashing state spending, and capping increases to pensions and civil
servant salaries.
Finance
minister Roland Lescure explained it was important to put France back on track
for deficit reduction.
But even
with this plan, the French budget deficit would only fall to 5% of GDP next
year.
Analysts
at ING warn that this deficit would be “far too high” to prevent France’s
national debt (already 119% of GDP) from rising higher.
In a note
titled France’s budget offers no quick relief for bond markets, ING say:
France’s
fiscal package would prevent the deficit from reaching 6.5% of GDP next year,
but it would not stabilise public debt. With a difficult political process
ahead, French bonds are likely to remain under pressure, while the threshold
for ECB intervention remains high
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