Tech rebounds, worries remain the same

The week started on a surprisingly, though cautiously, optimistic note ahead of a series of major central bank decisions and big company earnings.

First, the French 10-year yield dropped to 4.90% despite a weekend of heavy protests. Moody’s surprise decision NOT TO downgrade France’s credit rating on Friday played a bigger role than the impasse in French politics. That’s partly because credit ratings can affect the value of bonds used as collateral: a higher rating can mean a lower haircut, allowing investors to borrow more against their holdings and potentially earn extra returns. So the for-now stable rating, though with a negative outlook attached, helped ease the pressure yesterday, also narrowing the spread versus the German bond yield to 153bp from as much as 176bp last week. The CAC 40 jumped along with other major European indices.

US indices also gained, though on both sides of the Atlantic Ocean, companies with exposure to Brazil underperformed as the MSCI Brazil ETF tanked as much as 27% in pre-market trading — yes, 27% — and finished the day with a 20% loss following Lula’s surprise victory in the weekend’s presidential election. The drop was mostly driven by worries about fiscal discipline under Lula and the reversal of the bullish trade ahead of the election, when investors bet on a victory by his opponent, Flávio Bolsonaro — son of former president Jair Bolsonaro — on expectations of tighter fiscal discipline and more market-friendly policies. However, the latter refused to concede and said he would seek to annul the result… bringing back uncomfortable memories of contested elections and raising questions about what could go WRONG around the upcoming US midterms next week!