Key Takeaways
- More stability in France as a roll back on pension reforms led to the Socialist Party backing the government in a confidence vote.
- There is more work to be done but concessions could be enough to get next year’s budget through the parliamentary process.
- The Japan Innovation Party has committed to joining the coalition government – a move that should see Sanae Takaichi secure the Prime Minister role.
- A return to reform policies enacted by Shinzo Abe should prove positive for Japanese equities.
- Trade negotiations between the US and China are continuing ahead of President Xi and President Trump’s scheduled meeting next week. We expect pragmatism to prevail.
- We are in the middle of earnings season and will be watching releases from US regional banks closely as concerns around loan loss provisions grow.
This week we take a quick trip around the world and provide an update on the state of play around some of the key themes that have been moving markets recently.
First off in France where we now have a little bit more stability within the French coalition government. Sebastien Lecornu, the reappointed Prime Minister has pushed back on some of the pension reforms proposed by President Macron until after the next Presidential election. This move has helped get the Socialist Party onside in terms of backing the government in a confidence vote. Last Thursday we had two confidence votes and the government prevailed so we can now see them moving towards getting a budget across the line. There is still work to be done but in theory over the next few weeks enough concessions have been made to get parliamentary consensus behind next year’s budget.
Of course, the fundamental issue in French politics is that there is a three-way split within parliament which makes policy making difficult. There are still lots of unknowns and key dates further down the line include the 2027 Presidential election and the 2029 parliamentary elections. For now, Lecornu looks like he’s bought some time and a little bit of relief for French assets.
Japan is performing well as Sanae Takaichi, the prospective Prime Minister, now looks highly likely to assume that post. Takaichi won the vote to become LDP party leader a few weeks ago but subsequently we saw the coalition collapse. We’ve seen over the weekend that the centre right Japan Innovation Party will be joining the government – a move that means the combined votes should be enough to get Takaichi the premiership in tomorrow’s scheduled vote. Japanese equities like the prospect of a Prime Minister returning to reform policies enacted by Shinzo Abe.
Tariffs are back on the agenda in the US with President Trump threatening 100% levies on China last week following China’s announcement of new export restrictions on rare earths (the global supply is dominated by China). The US has three issues with China right now: one is fentanyl, two is rare earths and the third is the fact that China is not buying any US soybeans (and hasn’t been for several months now). There should be lower level talks this week ahead of President Xi and President Trump’s scheduled meeting for next week. Hopefully pragmatism will prevail given it is in neither’s best interest to impose 100% tariffs on the other. Trump has set the 1 November as a deadline, but we also have the 10 November as another line in the sand as the date when the 90-day tariff détente is due to be renewed once more.
Another factor to watch in markets is the credit loss and loan loss provisions from the US regional banks. We are in the midst of earnings season and banks that reported last Thursday surprised markets negatively with their loan loss provisions. On Friday however, other banks reported loss provisions that were less bad than feared. It is a situation that warrants close attention. There have been some concerns in US credit markets after a couple of US auto parts retailers failed and US auto loan delinquency data moved higher. JP Morgan’s Jamie Dimon commented last week that ‘when you see one cockroach there are probably more’. We will be closely watching the banks reporting numbers over the coming days and weeks. Normally in earning season it’s all about the mega caps – this time round maybe we should focus a little bit more on the regional banks.
