The EUR/USD chasm
One key US stock index, the S&P 500, recorded its 54th closing record for 2024 yesterday. Such equity performances are indicative of the fact that US sentiment and fundamentals continue to widen the transatlantic divide. Within the Eurozone, bond yields between member states continue to be volatile as spreads rise, with investors finding little incentive to hold such assets. Despite many Eurozone yields rising yesterday led en marche by French political developments, the Euro was unable to find any support.
Michel Barnier’s coalition government must agree a budget by year end. In order to pass a social security bill without involving Parliament, Barnier has triggered a mechanism that allows for a vote of no confidence to be called. This hasn’t formally happened yet but offers opponents, most notably Marine Le Pen, the opportunity to crush this government. Leads of opposition parties have been forthcoming to confirm their intent to call and vote against the Prime Minister in such a no confidence motion. Political bargaining will be taking place in France but it may cost the Prime Minister too much to give into Le Pen’s demands on pensions ultimately pushing France back into political limbo.
So far this narrative has been largely contained within the French fixed income market. However, the wider Eurozone impact could be to prompt action from the ECB for further rate cuts. There is key US data due this week that will test the USA’s role in the growing transatlantic divide. With the ISM survey passing yesterday, today and Friday will see heavyweight labour market data published. Swaps indicate that 70% of a 25 basis-point cut from the Federal Reserve on 18th December is currently priced in, supporting US equities.
Discussion and Analysis by Charles Porter
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