Sunset Market Commentary

Markets

The topic of fiscal sustainability for sure still has to role to play in the (near) future as markets are pondering an acceptable level for (sovereign) credit and other risk premia. However after the Japan/France driven stress over the previous days, the risk repositioning takes a breather. As a point in case, the Japanese 30-y yield today eased 14 bps (shorter maturities hardly changed). In Europe yields also eased. In France, the caretaker Prime Minister Lecornu indicated that there might still be a (admittedly) difficult road to finding a budget by the end of the year, reducing the chances of early elections. However for approving a budget, the socialist party apparently has set a higher price including a wealth tax and watering down/suspending the 2023 approved pensions reform. Even as this would only exacerbate the budgetary problems over time, Lecornu indicates that he still aims to reduce next year’s budget deficit below 5% of GDP. Whatever the final outcome, markets apparently again sees a somewhat bigger chance on some kind of muddling through scenario, rather than the outright chaos of new elections. The French 10-y spread vs Germany doesn’t widen any further (84 bps from 86 bps). At the same time, bond market conditions in EMU are easing a bit overall with German yields declining in a bull flattening move (2-y -2 bps; 30-y -3.5 bps). US yields follow this broader move in a session devoid of specific US eco news with yields ceding between 1.5 bps (2 y) and 3 bps (30-y). Later today, US investors still have a $ 39 bln 10-y Treasury auction and the Minutes of the September 17 meeting to look out for. The later might provide interesting insights of the internal FOMC debate, but the dots already suggested that there was absolutely no streamlined view on the Fed rate path going forward. Receding pressure from the fiscal sustainability topic/easier financial conditions also again supports equities after some hesitation over the previous sessions. The Eurostoxx 50 adds 0.4%. The CAC 40 even outperforms its European peers (1%). US indices open little changed.

On FX markets, the France-driven decline of the euro slows (EUR/USD 1.1635), but the picture remains fragile. The yen remains in de defensive (USD/JPY 152.50). Even so, recent moves in the yen already caused Fin Min Kato to warn that he will closely monitory excessive FX moves. At some point it also might support the case for the BOJ to still consider further policy tightening in October. For now the yen trend is still obvious, but some alert is warranted. To be continued.

News & Views

Hungarian inflation remained stable on a monthly basis for a second consecutive month in September. Food prices fell by 0.2% M/M and energy prices by 0.1%. They helped offset price increase in for example clothing and footwear (+1.5% M/M). The price of services decreased by 0.4% on average, within which recreational service prices – due to seasonal effects – lessened by 6.3%. Compared with September of 2024, price growth was unchanged compared to August as well at 4.3% Y/Y (vs 4.4% consensus). Energy prices are on average 10.6% higher, services became 5.9% more expensive, food prices are 4.7% higher and consumer durable prices were up by 2.5% Y/Y. The forint slightly recovers today from yesterday’s losses triggered by political pressure on the central bank to lower its policy rate from the current 6.5%.

The Bank of England published its quarterly financial stability update. Risks associated with geopolitical tensions, global fragmentation of trade and financial markets, and pressures on sovereign debt markets remain elevated. The risk of a sharp market correction has increased according the UK central bank. Despite persistent material uncertainty around the global macroeconomic outlook, risky asset valuations have increased and credit spreads have compressed. On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence (AI). There have been some notable credit defaults in the US automotive sector underscoring some of the risks around high leverage, weak underwriting standards, opacity, and complex structures. Term premia in sovereign bond markets have increased with some key jurisdictions having experienced political uncertainty over the level and pace of reforms to improve the fiscal outlooks. A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp re-pricing of US dollar assets.