Euro recovers, as Santa Rally gets off to a good start

December is Santa rally territory and so far, it’s got off to a good start. European equity markets are a sea of green on Tuesday, and French markets are bouncing back. The Cac 40 is higher by more than 1%, led by Hermes and LVMH, as China indicates that it could provide more stimulus as early as next week. Chinese leaders are set to announce 2025 GDP targets along with stimulus measures, and hopes are high that this will include measures to boost consumption.

For now, the markets are ignoring the geopolitical risks bubbling around the world. The French government is poised to collapse at some point this week, and China has decided to ban the export to the US of some items that can be used for military purposes, including gallium, geranium and other superhard materials. It will also use implement a stricter screening process for graphite exports to the US, which is a crucial input to produce lithium batteries. It will be interesting to see how Elon Musk reacts to this, and it suggests that the rest of the world will meet President Trump’s war on global trade blow for blow.

French markets recover, as euro stabilizes

Trade wars and sovereign debt fears are the two new existential fears facing financial markets as we look towards 2025. Trade wars are on course to be a lingering concern for markets until Donald Trump gets into the White House and implements his strategy. Sovereign debt woes are now firmly focused on France. However, these seem contained for now. French bond yields are stable on Tuesday, and the euro is higher, after EUR/USD found decent support at $1.05. The French-German yield spread, which is where investors have expressed their concerns over French fiscal sustainability, is also down a touch on Tuesday at 85bps. This is still close to the highest level since 2012, but it suggests that the market is not willing to push French bonds to breaking point at this stage.

The eyes of the bond vigilantes remain on France; however, the lack of urgency could be down to the fact that even if the technocratic government led by Michel Barnier does fall this week, the President could pick another one, the Budget can get through parliament using emergency measures by 21^st Dec and there cannot be another Parliamentary election until summer 2025. Thus, French concerns have not gone away, but there is unlikely to be a fiscal crisis until next year. If there are elections next summer, and if the more radical parties can form a government, then their Budget could be a bigger shock for the French bond market, although that is a concern for late 2025.

French sovereign risks contained for now

Also worth noting is the lack of contagion. In the past, when one sovereign domino has fallen in the currency bloc, it has tended to knock others. However, that has not been the case, as you can see below.

Chart 1: 10-year bond yield spreads, French – German, and Spanish- German.

Source: XTB and Bloomberg

French budget risks will continue to be a thorn in the side for markets, however, the real risk could be further down the road.

Elsewhere, there have been good and bad news for the UK market this morning. The BRC retail sales survey for November fell 3.4%, which paints a dreary picture for UK retail sales.  However, the survey period missed Black Friday, so sales could pick up in December.

London Shein’s for mega IPO

Also, the FCA has smoothed the path for Chinese fast fashion retailer Shein to list on the London Stock Exchange. The FCA said that its decisions on whether a company can list on the LSE are dependent on their disclosures only, and not every aspect of their corporate behavior. This suggests a sea change at the FCA, as it will allow investors to make up their own minds about the legal risks that face Shein. If Shein does list in London, then its £50bn valuation would make it the most valuable company on the UK index and the largest IPO in the UK. London is in desperate need for a mega IPO to rival that of New York. It would also boost the UK index’s exposure to global sales and large revenues, something that has been missing from some home-grown companies. Thus, the London market may ‘Shein’ as investors digest the prospect of a mega IPO coming to these shores next year.

US rate cut hopes given a boost

Ahead today, the US Jolts job openings figure will be watched closely, as we lead up to the NFP report on Friday. US markets may also extend gains further after Fed governor Waller, considered one of the most important Fed members, said that he would support a rate cut in December, and gradual rate cuts after that. There is now a 72% chance of a rate cut priced in by the Fed Fund Futures market for this month, which could fuel this Santa rally further.