Asian Markets Start the Week on Positive Note with Japan Outperforming

Markets

Ongoing trade tensions between the US and China and a spike in uncertainty related to US regional banks (fraud-linked) undermined risk sentiment last week. Credit tensions in Europa were temporary mitigated as old/new French Prime Minister Lecornu on Thursday survived two no-confidence votes, allowing him to work on a 2026 government budget. Even so, rating agency S&P on Friday stripped the country from its AA status, suggesting that the topic of (French) debt sustainability is here to stay. The multiple sources of uncertainty supported a solid bid for core bonds lately with US yields (temporary?) dropping below key support levels (2y 3.45% area, 10y 4% area) and markets even pondering whether there was a good reason for the Fed to consider a faster path of easing than the two additional 25 bps steps seen this year as the by default scenario. German yields also ceded some important technical levels (2y 1.9% area, 10y 2.6% area) and in a weekly perspective even outperformed Treasuries. On Friday, decent results from some other (regional) US banks and some comforting comments from President Trump on the US-Chine trade war, finally soothed sentiment going into the weekend. US yields rebounded 2 bps (30y) to 4.5 bps (5y), returning above the mentioned support levels. German yields managed to close 1-2 bps higher despite a steep initial decline. US equites finished with modest gains (0.5%). The dollar regained some ground after (bank-related) losses on Thursday. (DXY closed at 98.43 from 98.33). EUR/USD reversed Thursday’s rebound north of 1.17 to close the week at 1.1655.

Asian markets start the week on a positive note with Japan outperforming (Nikkei +2.9%). The LDP party reached a collation agreement with the Japan Innovation party (Ishin), building the case for a growth-supportive policy. Short-term Japanese yields are rising 3-4 bps (2-10-y sector). The yen shows no clear trend (USD/JPY 150.65). The eco calendar is again very thin today. European investors will look out for the fall-out from the S&P downgrade of France. After easing a few bps last week, futures suggest again some further French spread widening this morning. For now, the there is little additional damage for the euro (EUR/USD 1.1665). On interest rate markets, we look out whether last week’s lows might turn into some kind of support with the earnings season and headlines on US-China trade still potential risk factors to unsettle sentiment. For now, the dollar shows no clear momentum with EUR/USD again firmly within the 1.155/1.19 trading range.

News & Views

Rating agency S&P cut France’s rating into single A territory end last week. S&P wasn’t supposed to review France until November 28, making Friday’s decision all the more remarkable. France now enjoys an A+ rating with a stable outlook that balances rising government debt and weak political consensus against the country’s credit strengths. The rating agency said “France is experiencing its most severe political instability since the founding of the Fifth Republic in 1958” and added that even if snap elections would produce a clear majority there’s no guarantee for credible medium-term fiscal consolidation or economic reform implementation. It expects next year’s budget deficit to only marginally narrow from 5.4% to 5.3% and comes with the disclaimer of huge uncertainty ahead of the 2027 presidential elections. French PM Lecornu repeatedly said that bringing it back to below 5% in 2026 is key. S&P projects government debt to climb to 121% by 2028 vs 112% last year. With two (Fitch, S&P) out of the three major rating agencies now having a single A rating, some funds with strict investment criteria may be forced to offload French OATs. OAT futures this morning lose ground. Rating agency Moody’s (Aa3, stable outlook) has a review scheduled this Friday.

Chinese GDP grew by 1.1% q/q in the previous quarter, in line with Q2’s 1% and better than the 0.8% expected. The economy is 4.8% larger in y/y terms and 5.2% bigger YtD. Accompanying monthly data showed retail sales grinding slower from 3.4% y/y to just 3% but industrial activity (export) jumping to 6.5% from 5.2%. Investment dropped by -0.5% y/y YtD, a rare decline mainly caused by the ailing real estate sector. China after the data release said they remain on track to hit the 5% growth target for 2025. While the outcome was in line to slightly below expectations, markets are looking through and draw comfort from signs of easing trade tensions. They are also on the lookout for today’s start of the Fourth Plenum, during which the next 5-year plan is being worked out. China’s yuan stabilizes around USD/CNY 7.12.