UBS On-Air: Paul Donovan Daily Audio 'Fiscal largesse for no progress'
The desk is interpreting the recent rejection of the revenue components of the French budget by the lower house of the National Assembly as a reflection of the ongoing complexities in French fiscal policy. Per the full note from UBS, this development will likely have minimal immediate impact on the markets, given the government's lack of a parliamentary majority and the procedural nature of fiscal negotiations in the Fifth Republic. Furthermore, the broader sentiment suggests that external factors, such as the recent G20 summit, may exacerbate fiscal deficits without providing substantial economic solutions. Understanding that these events unfold against a backdrop of rising economic nationalism adds depth to the market's potential response.
What the desk is arguing
The recent rejection of the revenue component of the French budget indicates ongoing challenges for the government in gaining legislative support. This procedural standoff is emblematic of the challenges presented by a minority government in the current Fifth Republic structure, as discussed by Paul Donovan at UBS. The desk frames this as a temporary obstacle without significant market ramifications in the near term.
The likelihood of further delays in the French budget process was highlighted, as discussions move to the Senate without amendments. Given the historical context of the French fiscal process, the markets may remain indifferent as fiscal outcomes tend to reflect long-term structural issues rather than immediate volatility.
Where it sits in our coverage
Our consensus targets for EUR/USD currently sit at 1.075 with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's outlook aligns more closely with jpmorgan, which anticipates stability in EUR/USD around the upper end of our range as the budget discussions unfold. There is divergence at the lower bounds of our consensus where bofa suggests a more pessimistic path.
How other firms see it
Firms such as jpmorgan and others appear to be aligned in believing that the French fiscal situation will stabilize without causing immediate disruption in the markets. Conversely, bofa has a less optimistic outlook, suggesting vulnerabilities tied to the budget process.
In this context, watch EUR/USD as it offers insights into the general market sentiment surrounding the Eurozone's fiscal health and stability in response to domestic political shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01French National Assembly's rejection of budget highlights ongoing fiscal challenges.
- 02Minimal market impact anticipated, rooted in procedural legislative complexities.
- 03G20 summit outcomes pose longer-term implications for budget deficits.
- 04Market sentiment likely hinges on economic nationalism and a minority government framework.
Market implications
Monitoring levels around 1.075 in EUR/USD could provide insight into how traders are factoring in the French budget developments. If momentum shifts higher or lower, traders should adjust positions accordingly. The next fiscal updates from the Senate will also serve as critical indicators of potential market reactions.
Risks to this view
A shift in parliamentary support or unexpected macroeconomic data that significantly impacts investor confidence could invalidate this call, particularly if the Senate alters budget components in a way that affects public spending or impacts growth forecasts.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 24th of November. Over the weekend, the lower house of the French National Assembly rejected the revenue part of the government budget plan.
The budget heads to the Senate for discussion without any amendments being attached. The impact of this for financial markets is likely to be minimal. It's just another step in the somewhat complicated budget process when the government lacks a majority in the Fifth Republic.
Investors who care about such things should also realise that this is a process that will drag on a while longer and there's unlikely to be any reaction to the latest rather small step. The G20 summit that just concluded in South Africa will of course have contributed to the French government budget deficit and the deficits indeed of other attending nations by spending taxpayers' money to fly officials around the world for what could be achieved with a simple combination of a Zoom call and judicious use of Photoshop. It's hard to claim that the G20 has ever been useful and the worthy sentiments about minimum tax regimes and multilateral cooperation in this week's statement have not done anything to change the perception that these summits are little more than a taxpayer-financed weekend mini-break for, no doubt, hard-working politicians.
In a world of rising economic nationalism and, more broadly, prejudiced politics, statements supporting multilateralism are all very well. The problem is that politicians so often have an incentive to pursue prejudice and economic nationalism is one of the easiest routes to take. Fighting back against prejudice can take place but it's more likely to be economic self-interest that brings this about.
Prejudice is particularly negative for economic growth in the current period of structural change. The Germans are issuing the IFO Business Sentiment Opinion Poll for November. It would be nice to be able to believe in such things as sentiment surveys but, sadly, that naive innocence, once lost, can never be regained.
ECB President Lagarde is speaking. This is hardly unusual but, on this occasion, Lagarde is speaking at an artificial intelligence conference. That's mildly interesting.
European companies have seemed less inclined to use AI as a convenient excuse for chief executive officers' past errors. There's been far less talk of having to fire workers that were originally overhired in a wave of excessive enthusiasm because AI made me do it. The US Dallas-fed Manufacturing Sentiment Poll is due for release and, of course, this survey includes the always-hilarious comments section where respondents reveal the depth of political polarisation or, alternatively, the hallucinogenic qualities associated with watching partisan cable news networks.
The Fed will be revising industrial production data for the last year which is not, of itself, market-moving but it is a reminder of the declining accuracy of economic data in real time and the necessity of having to revise for years after a data point has been released. That's all for today. Have a good day.
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