Debt remains key, with Japan and France both shifting away from fiscal conservatism

European equities have delivered a largely mixed performance in early trade today, with the CAC 40 leading the gainers despite ongoing political and fiscal uncertainty. French stocks advanced strongly despite the latest political turbulence, as investors shrugged off the ousting of former Prime Minister Michel Beyrou, with his failed vote of confidence largely priced in by markets. Beyrou’s efforts to reduce spending in a bid to bring down the French debt burden means his successor is likely to take a less conservative approach which means higher spending and continued debt concerns. For now, that means good news for stocks, but the weakness in the euro highlights ongoing question marks around the stability of the region.

Another day, another record high for gold, with Friday’s downbeat jobs market assessment bringing yet another dose of optimism for those hoping the Fed will ramp up easing. The 22,000 payrolls figure once again relied heavily on healthcare which appears to be the only sector keeping US payrolls from being negative each month. With inflation data due this week, another controlled CPI figure could yet bring additional hopes of a 50bp cut next Thursday (currently priced at 12%). In Washington, Donald Trump has called for a review of the Bureau of Labor Statistics, once again seeking to shift the blame after Friday’s damning assessment. This raises the question of whether we could see the monthly jobs data become less frequent in the future. Meanwhile, the Long-Term Stock Exchange have petitioned the SEC to allow companies to halve their reporting cadence, publishing results twice a year rather than quarterly.

Concerns over sovereign debt are adding fuel to the fire once again, with both the French and Japanese Prime Ministers ultimately losing their jobs owing to a fiscally conservative view in the face of elevated debt and borrowing costs. France’s fiscal consolidation plans are likely to fade with a new prime minister in place, while Japan’s incoming leadership is expected to embrace looser fiscal policy than Ishiba had espoused. In an age of changing market narratives, the rising debt problem that has gathered pace in the wake of the pandemic looks to be a trend that is only heading in one direction. Fortunately, we have seen some downside for treasury yields since Wednesday’s peak, although markets are likely to remain highly responsive to any additional upward pressure in borrowing costs.