UBS On-Air: Paul Donovan Daily Audio 'French lettuce?'
Lead — Recent political developments in France, particularly the resignation of Prime Minister Lecornu, present a moderate risk within the EU context, but are not expected to destabilize the bond market significantly. Per the full note source, while the situation draws comparisons to the UK's earlier fiscal crisis, French bonds remain orderly and likely command a risk premium amid political uncertainty. The focus is now on whether a new fiscal solution can be achieved that garners National Assembly support, which would prevent any negative fallout on fiscal stability. Traders should remain attentive to evolving political dynamics in France, yet the broader impacts on the eurozone may be contained, especially as no major events are currently on the calendar to precipitate volatility.
What the desk is arguing
The resignation of French Prime Minister Lecornu, although notable, does not mirror the chaos observed with UK's Truss, as the French bond market remains orderly. Per the full note from UBS, the situation presents a chance for Macron's government to stabilize fiscal policies, and thus importantly, French assets are still seen as maintaining a risk premium during this transitional period.
There is a crucial distinction here: while fears over fiscal sustainability significantly affected the UK's financial landscape, French fiscal policies might not deteriorate if they remain on autopilot. Investors might still benefit from holding onto French bonds, at least in the short term, as their national assembly deliberations unfold.
The alternative read that some market participants might consider is that any rapid political changes could lead French assets to underperform. However, given the current stance of the bond market, this seems unlikely in the immediate term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lecornu's resignation poses moderate risk but not a fiscal crisis similar to the UK's.
- 02The French bond market remains stable, indicating retained confidence among investors.
- 03Potential for new fiscal policy could emerge as Macron seeks National Assembly support.
- 04French assets maintain a risk premium amid ongoing political uncertainty.
Market implications
Watch the performance of French bonds for any signals of instability as political negotiations unfold. Any indications of agreement in the National Assembly may strengthen the euro against key pairs, while failure could destabilize the market sentiment.
Risks to this view
The primary risk to this outlook lies in the potential for political deadlock or unexpected elections, which could raise concerns about fiscal sustainability in France. Additionally, major economic data or shifts in the eurozone policy landscape could shift the balance, triggering bond market volatility.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 7th of October. France's Prime Minister Le Corneau resigned yesterday, a day after their government was announced.
President Macron asked Le Corneau to work for another 48 hours before collecting their severance payment in order to try and find a fiscal solution that would command support in the National Assembly. While Le Corneau's period in office was shorter than the lifespan of a lettuce, investors should be wary of comparing this to the UK's trust debacle. That was about a loss of control of the bond market and a view that fiscal policy was being made materially less sustainable.
The French situation still has a more or less orderly bond market and the fiscal situation may not get better, but if put onto autopilot by rolling over the current fiscal policies things don't materially deteriorate. French assets will still command a risk premium as markets wait to see whether some government can be formed or whether Assembly elections become inevitable, albeit without necessarily providing a solution. Argentina, meanwhile, saw yet more foreign exchange intervention overnight.
US Treasury Secretary Besant highlighted constructive talks with their Argentinian counterpart, but nothing of substance has been announced. Besant suggested last week that an aid package for US soybean farmers may come as soon as today. That's relevant, as the last tranche of US assistance to Argentina seemed to support their soybean farmers.
There is some US data today, or there should be, in the form of the August US consumer credit numbers. This data is published by the Federal Reserve and the Federal Reserve is not directly involved in the ongoing government shutdown thing. As an isolated data release, this has diminished value.
Would an increase in consumer credit signal more optimism on the part of consumers, increasing spending, or is it the case that declining real incomes are forcing consumers to tap their credit cards in order to maintain living standards? Without the context of other data sources, it's hard to make a definitive assertion. Meanwhile, US President Trump posted on social media that US buyers of imported medium and heavy trucks would be tariffed 25% from the 1st of November.
Trump had previously posted that US buyers of imported heavy trucks would be tariffed 25% on the 1st of October, but either forgot or otherwise failed to implement that policy. Away from the French political salad, Europe is pretty quiet. ECB President Lagarde is speaking again.
Sources & References
How we cover this story