Japan's new LDP leader seen as an ultra-dove by markets

EU Mid-Market Update: As the world plunges into a fresh round of political chaos, observers note 'Au Revoir' to France's 6th PM since Macron's 2022 reelection; Japan's new LDP leader seen as an ultra-dove by markets.

Notes/observations

- Newly appointed French PM Lecornu resigned less than 24 hours after forming his cabinet, amid opposition from allies and foes alike over fiscal and EU policies. Exacerbates ongoing instability following snap elections, raising fears of prolonged gridlock and budget delays under President Macron. Markets reacted sharply: CAC 40 index tumbled ~2.0% in early trading, its steepest daily drop in months, as investors fled to safe havens. 10-year OAT yields spiked nearly 10bps, signaling heightened risk premiums. Spread with German 10-year widened to +89bps, largest since 2024.

- French press reports that Pres Macron has accepted PM Lecornu’s resignation and will run a caretaker government while he consults party leaders to either appoint a new prime minister or consider dissolving the National Assembly, a step that constitutionally requires consultations and would trigger elections within 20 to 40 days. Opposition leaders are pushing hard choices now.

- Overnight, Japan's ruling Liberal Democratic Party (LDP) elected Sanae Takaichi as its new leader, positioning the China hawk and ultra-conservative fiscal dove - known for advocating aggressive stimulus and business-friendly reforms - as the likely next PM. Her victory signals a potential pivot toward monetary easing to combat deflation, contrasting with her hawkish predecessor. Equities surged in response: Nikkei 225 rocketed nearly 5% to a record above 47K, driven by gains in tech and export sectors. Yen weakened 2.0% against the USD to ¥150, amplifying carry trade appeal as market-implied hances for BOJ hike in Oct dropped from 50% to 20%. Besides stimulus promises, the key comment in her Takaichi's inaugural speech (she yet to be confirmed PM in 10-14 days) was her respect towards trade deal reached with US.

- Czech Republic saw election results as well, with populist billionaire Andrej Babis’ ANO party securing win with ~35% of the vote, ousting center-right coalition. Babis promises lavish spending, tax cuts, and reduced Ukraine aid - aligning Prague closer to Hungary and Slovakia's skeptical stance. Coalition talks loom, with ANO eyeing a provisional 2026 budget to fast-track reforms, potentially straining EU fiscal rules. Emerging European markets showed mixed reactions. A Trump ally.

- In his weekend posts, Pres Trump said big homebuilders are acting like OPEC by keeping prices high and urged Fannie Mae and Freddie Mac to finance them to start building, claiming they are sitting on 2M empty lots and that more construction would help restore the American Dream. In separate post, he said talks with Hamas and international partners on hostages and ending the Gaza war are advancing quickly, with technical teams meeting Monday in Egypt and a first phase expected this week.

- Tesla announced holding some event on Tue, October 7th, with analysts note possibility for details on Tesla's more affordable model.

- OpenAI said to unveil its Agent Builder at today’s 6 DevDay, a drag-and-drop workflow tool with templates and modular nodes (logic, connectors, approvals, file search, data transforms) that lets developers and teams using OpenAI APIs build, test, and deploy AI agents for tasks like customer service, data enrichment, Q&A, and document comparison.

- Asia closed mixed with Nikkei225 outperforming +5.0%. EU indices -0.3% to -1.6%. US futures +0.1-0.5%. Gold +1.5%, DXY +0.7%; Commodity: Brent +1.6%, WTI +1.6%; Crypto: BTC +0.8.%, ETH +0.4%.

Asia

- Takaichi won LDP leadership after 3 rounds of voting. Viewed as a fiscal expansionist. Nilklei at record high above 47,900; USD/JPY above 150 level; JGB yield curve steepens. Oct BOJ rate hike declines to 21.0% v ~50% before the weekend.

Global Conflict/tensions

- Russia President Putin said that if the United States supplied Tomahawk missiles to Ukraine for long-range strikes deep into Russia then it would lead to the destruction of Moscow's relationship with Washington.

- Hamas said to be committed to reaching an agreement to end the war in the Gaza Strip.

Europe

- France PM Lecornu’s new minority government risks being short, facing hostility in Parliament where it lacked a stable majority. Appointed Lescure, a close ally of President Emmanuel Macron, as finance minister. Macron's opponents on the left of the National Assembly are mustering efforts to bring down Lecornu with a no-confidence vote, and the far-right National Rally party of Marine Le Pen is pushing for snap legislative elections.

- France PM Lecornu said to be planning a new tax on people earning >€250K/year (**Note: The Socialists, who met with PM Lecornu on Oct 3rd called for a suspension of the pension reform or the introduction of the tax on very high net worth individuals).

Americas

- US government shutdown continues. President Trump commented that firing of federal employees was now occurring.

- President Trump: Asking Fannie and Freddie to get 'big homebuilders going'; homebuilders have to start building homes.

Trade

- New Japan PM said to plan to honor an investment deal with President Trump that lowered his punishing tariffs in return for Japanese taxpayer-backed investment.

Energy:

- Eight OPEC+ members, led by Saudi Arabia, announced they would boost production by 137,000 barrels per day in November,

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.30% at 568.76, FTSE -0.17% at 9,475.46, DAX +0.03% at 24,394.17, CAC-40 -1.78% at 7,937.74, IBEX-35 -0.25% at 15,561.10, FTSE MIB -0.32% at 43,120.00, SMI -0.02% at 12,507.64, S&P 500 Futures +0.26%].

Market Focal Points/Key Themes: European indices opened generally lower and remained under pressure through the early part of the session; political situation in France seen weighing on risk appetite; Israel closed for holiday; better performing sectors include energy and industrials; among sectors leading the way lower are consumer discretionary and communication services; oil & gas subsector supported after OPEC+ raises production by less than expected; Natara raises offer for Treatt; earnings expected in the upcoming US session include Constellation Brands.

Equities

- Consumer discretionary: Groupe SEB [SK.FR] -21.0% (cuts outlook).

- Energy: Engie [ENGI.FR] -4.5% (French PM resigns).

- Financials: BNP Paribas [BNP.FR] -6.0% (French PM resigns).

- Industrials: Stellantis [STLA.FR] +2.0% (reportedly planning to invest ~ $10B in the US), Aston Martin Lagonda Global Holdings [AML.UK] -7.5% (cuts outlook), Mondi [MNDI.UK] -17.0% (trading update).

- Technology: ASML [ASML.NL] +1.5% (Foxconn guidance).

- Real Estate: Sirius Real Estate [SRE.UK] -2.5% (trading update).

Speakers

- ECB’s De Guindos (Spain) reiterated that rates were appropriate but uncertainty remained very high. Noted that consumption had grown less than expected.

- ECB’s Lane (Ireland, Chief Economist) reiterated to follow a data-dependent and meeting by meeting approach.

- France PM Lecornu resigned; stated opposition parties set lots of red lines in talks.

- France Socialist Leader Faure stated that could not see how party would not be in a position to vote against the government
Bank of Japan (BOJ) Quarterly Regional Economic Report (Sakura): Maintains assessment in 8 of 9 regions.

Currencies/fixed income

- USD/JPY moved above 150.30 as the new LDP leader Takaichi made clear her stance on a proactive fiscal policy. Her elevation of position raised policy uncertainty particularly to the timing on a BOJ rate hike. Speculation of a Oct BOJ rate hike went from 50% to approx. 20% following the LDP vote. Dealers noted that based on hard financial and economic data, an October interest rate hike was almost entirely justified. The biggest obstacle to an October hike is politics.

- EUR/USD moved back below the 1.17 as French politics continued to be in focus. France PM Lecornu’s new minority government risked being short, facing hostility in Parliament where it lacked a stable majority. The pair took another leg lower on reports that the French PM did resign.

- Spot Gold approaching $4,000/oz as the US govt shutdown continued into the 2nd week.

- 10-year German Bund yield at 2.70%, France 10-year Oat at 3.56% and 10-year Gilt yield at 4.72% 10-year Treasury yield: 4.13%.

Economic data

- (DK) Denmark Aug Industrial Production M/M: -2.9% v +1.2% prior.

- (HU) Hungary Aug Retail Sales Y/Y: 1.9% v 1.9%e.

- (CH) Swiss Sept Unemployment Rate: 2.8% v 2.8%e; Unemployment Rate (seasonally adj): 3.0% v 2.9%e.

- (ES) Spain Aug Industrial Production M/M:-0.1 % v +0.4%e; Industrial Output Y/Y: 3.4% v 3.5%e; Industrial Output NSA (unaj) Y/Y: 0.4% v 2.5% prior.

- (CZ) Czech Sept Preliminary CPI M/M: -0.6% v -0.3%e; Y/Y: 2.3% v 2.6%e.

- (DE) Germany Sept Construction PMI: 46.2 v 46.0 prior.

- (CH) Swiss Weekly Total Sight Deposits (CHF): 477.0B v 474.7B prior; Domestic Sight Deposits: 445.0B v 446.6B prior.

- (UK) Sept New Car Registrations Y/Y: +13.7% v -2.0% prior.

- (EU) Euro Zone Oct Sentix Investor Confidence: -5.4 v -7.7e.

- (UK) Sept Construction PMI: 46.2 v 46.0e (9th month of contraction).

- (EU) Euro Zone Aug Retail Sales M/M: 0.1% v 0.1%e; Y/Y: 1.0% v 1.3%e.

Fixed income issuance

- (NO) Norway sold NOK2.0B vs. NOK2.0B indicated in 3-month bills; Avg Yield: 3.93% v 4.09% prior; Bid-to-cover: 1.56x v 1.78x prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (DE) Germany to sell combined €4.5B in 6-mointh and 12-month Bubills.

- 05:30 (NL) Netherlands Debt Agency (DSTA) to sell €2.0-4.0B combined in 3-month and 6-months bills.

- 05:30 (ZA) South Africa announces details of upcoming I/L bond sale (held on Fridays).

- 06:00 (IL) Israel to sell bonds.

- 07:25 (BR) Brazil Central Bank Weekly Economists Survey.

- 07:30 (TR) Turkey Sept Real Effective Exchange Rate (REER): No est v 69.84 prior.

- 08:00 (MX) Mexico Sept Consumer Confidence: 46.9e v 46.7 prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (IN) India announces details of upcoming bond sale (held on Fridays).

- 08:00 (ES) Spain Debt Agency (Tesoro) size announcement on upcoming issuance.

- 09:00 (FR) France Debt Agency (AFT) to sell €6.7-8.3B in 3-month, 6-month and 12-month bills.

- 11:00 (CO) Colombia Aug Exports: $4.1Be v $4.4B prior.

- 11:30 (US) Treasury to sell 13-Week and 26-Week Bills.

- 13:00 (EU) ECB Chief Lagarde.

- 13:30 (UK) BOE’s Bailey.

- 14:00 (BR) Brazil Sept Trade Balance: $2.7Be v $6.1B prior; Exports: $30.0Be v $29.9B prior; Imports: 27.8Be v $23.7B prior.

- 16:00 (US) Weekly Crop Progress Report.

- 17:00 (NZ) New Zealand NZIER Business Opinion Survey.

- 19:30 (AU) Australia Oct Westpac Consumer Confidence: No est v 95.4 prior.

- 19:30 (JP) Japan Aug Household Spending Y/Y: 1.2%e v 1.4% prior.

- 19:30 (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: No est v 49.6 prior.

- 20:30 (AU) Australia Sept ANZ-Indeed Job Advertisements M/M: No est v 0.1% prior.

- 21:00 (PH) Philippines Sept CPI M/M: 0.2%e v 0.6% prior; Y/Y: 2.0%e v 1.5% prior.

- 23:00 (ID) Indonesia Sept Foreign Reserves: No est v $150.7B prior.

- 23:35 (JP) Japan to sell 30-year JGB Bond.