ON DECK FOR MONDAY, OCTOBER 6
KEY POINTS:
- Political risk is in the driver’s seat
- Japan’s likely new PM drives large market moves…
- …on speculation she will be a fiscal expansionist
- France’s new PM resigns weeks into the job…
- …as political dysfunction continues to stymie fiscal reforms
- Global Week Ahead — Pick Your Subsidies (here)
Political risk is in the driver’s seat once more. The action is focused upon France and Japan amid an otherwise empty calendar. Spillover effects are driving bear steepening in US Ts.
FRENCH POLITICAL TURMOIL CONTINUES
French bonds are getting hit by the latest crisis. Spreads over 10-year bunds are about 5bps wider and the CAC40 is underperforming with a 1½% drop.
The catalyst is that yet another French Prime Minister—this time Sebastien Lecornu—has resigned only a few weeks into the job. He wasn’t terribly successful at steering budget proposals, but the tipping point was when the opposition as well as a key figure from the center-right lashed out at President Macron’s appointment of essentially the same cabinet amid demands for fresh faces. France remains paralyzed by political dysfunction that is preventing fiscal reforms.
MARKETS SPECULATE THAT JAPAN’S NEW PM WILL BE A FISCAL EXPANSIONIST
The yen is about 2% lower to the dollar and leading underperformers. The Nikkei ripped higher by almost 5% overnight. The JGBs curve bull steepened with 2s richer by about 4bps.
The catalyst? Japan’s Liberal Democratic Party chose Sanae Takaichi as their leader and she is very likely to be voted in as PM next week. She was an ally of the late former PM Shinzo Abe and is widely viewed as being pro-stimulus and pro-reform while skeptical toward BoJ policy tightening. Clearly we need to see concrete proposals and in the context of a divided parliament in which her party no longer holds majorities in either chamber. For now, markets are behaving in knee-jerk fashion by assuming she will add to fiscal expansionism.
I’m not sure about speculation that BoJ hike pricing should be rolled back. Pricing for the October 29th decision was chopped from 14bps of a quarter point hike to 6 bps. A big ‘if’ is whether more fiscal stimulus can be pushed through, but if it is, then it might embolden BoJ hikes.
Other than watch for any further developments around the US government’s shutdown. No meaningful progress was made over the weekend.
There are no material releases due out.
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