Source: Reuters

Motion of no confidence

On Monday, faced with the impossibility of passing the social security budget, and despite the many concessions made to the far right, French Prime Minister Michel Barnier decided to use Article 49.3 of the Constitution, which allows the government to force through legislation unless a motion of no confidence is passed. 

The primary aim was to implement the social security budget. This decision opens up the possibility for members of parliament to table a motion of censure against Barnier's government. On Monday evening, the left-wing parties (124 MPs) and right-wing parties (Marine Le Pen's RN and Eric Ciotti's supporters, 140 MPs) decided to submit a motion of no confidence. 

These motions of no confidence will be analysed and voted on in the National Assembly no earlier than the evening of Wednesday, 4 December. To bring down the government, a majority of the 577 MPs must support them. To obtain a majority, the left-wing parties must vote with the far-right RN on the same motion of censure. This would lead to the fall of the government.

At this stage, this is the most likely scenario, as Le Pen has indicated that her party is prepared to vote in favour of the motion of censure tabled by left-wing MPs. While a last-minute twist is still possible, all indications are that the government will have fallen by the end of the week, less than three months after its appointment. This will usher in a new period of political uncertainty.

What happens next?

There will be no dissolution of the National Assembly or early elections before July 2025, as the Constitution provides for a minimum period of one year between elections. Then, based on the forces present, President Emmanuel Macron will have to appoint a new prime minister. Two scenarios are possible: either a new government is appointed in December, or there is no new government until the end of 2024. 

Given the challenges in appointing Barnier as prime minister, the likelihood of finding a replacement quickly is highly uncertain. With an extremely polarised National Assembly divided into three major camps – left, centre-right and extreme right – who are unable to reach a compromise, the risk of a new vote of no confidence for any new government is very high.

In any case, it is almost certain that there will not be a majority to pass a state budget or a social security budget before the end of the year. The last few weeks have shown that MPs and Senators are extremely divided on how to restore public finances and that a consensus is virtually impossible.

The recovery of public finances is in jeopardy

It seems unlikely that France will have a 2025 budget. However, this doesn’t imply a shutdown where France can’t meet its financial obligations. A provisional budget, likely mirroring the 2024 budget, will probably be implemented. Such a budget will not rectify the trajectory of public spending. The public deficit is expected to exceed 6% of GDP in 2024. The Barnier government had hoped to reduce it to 5% by 2025, but without a budget voted for in 2025, this target will not be met. The provisional budget will be slightly restrictive, as tax scales will not be adjusted for inflation, but will not contain any real savings measures.

As a result, it will not be enough to set the trajectory of French public finances in the desired direction and will not respect the commitments made by France to the European authorities. At a time when economic growth in France is slowing markedly, this is bad news. The public deficit will remain high, debt will continue to grow and the next government – whenever that may be – will have an even tougher task to put public finances right.

In short, the political situation will delay and likely complicate the recovery of public finances, but it will eventually occur. The only difference is that the starting point will be later.

French drama adds to euro woes

This French political stand-off is just one more negative for the euro. With the eurozone economy facing the threat of tariffs in 2025 and the region lacking any prospect of cohesive fiscal support, the potential fall of the French government merely adds to views that the ECB will have to do the heavy lifting in 2025. Notably, short-dated yield spreads have moved against EUR/USD as this French crisis comes to a head, pushing EUR/USD back below 1.05.

Seasonally the dollar is weak in December. Europe will remain a drag on EUR/USD into year-end. With both the French and German governments in limbo, any EUR/USD bounce will have to be driven by softer US data and a dovish 25bp rate cut from the Fed on 18 December. Overall, we have a year-end target for EUR/USD at 1.05, but see the risks skewed towards the 1.02/03 area.

Typically, EUR/CHF comes under pressure when European politics hit the headlines. We are a little surprised it is still trading above 0.93 and expect it to press 0.92 should it become clear that the Swiss National Bank cannot cut rates as deeply as the ECB next year.

French bond spreads already reflect a lot of pessimism

The 10y yield spread of French government bonds over their German peers widened to 88bp on Monday. Further widening looks likely as politics enters a new phase of elevated uncertainty.

Looking at relative valuation across the entire eurozone bond spectrum, there are two key takeaways. First, the spillover to other markets has been limited. Italy, for instance, is still at spread levels closer to their tightest since 2021. Second, markets had been wary about the prospects of quickly solving French fiscal problems to begin with, reflecting an expectation of looming rating downgrades. Following the latest widening, French 10y spreads over swaps are more in line with an “A-“ rating rather than its current  “AA-“ – three notches lower. In fact, French spreads are already well above Spain’s and now are on a par with those of Greece.   

Investors already see France climbing down the ratings ladder

Source: Rating agencies, Refinitiv, ING

Government fragility was always part of the picture, even if not expected to come to a head quite so soon. Though it may take a while, a clearer picture going forward should allow spreads to recover from these stretched levels. However, France won’t be able to avoid a more lasting downgrade in its implied rating by the market, making the spread levels against Bunds seen before June’s elections seem quite distant.

Since our last publication, the higher risk-sensitive EUR/CHF cross pair has wobbled as it grappled with the Eurozone’s economic weakness and a looming unfavorable external trade environment due to further global supply chain disruptions due to incoming US President-elect Trump’s 10% to 20% tariffs threat on other countries’ exports to the US, inclusive of the Eurozone.

The EUR/CHF inched lower in the week of 18 November (ex-post US Presidential election outcome on 6 November) and retested a key intermediate support of 0.9255, a key swing low made almost a year ago on 29 December 2023.

An increase in France’s sovereign bond credit risk premium

Fig 1: 10-year yield spread of French sovereign bond over German Bund as of 3 Dec 2024 (Source: TradingView, click to enlarge chart)

The credit risk premium of longer-term sovereign debt in France can be defined by the 10-year yield spread between France’s and Germany’s sovereign bonds (Bunds)

When the yield spread between 10-year France’s sovereign bonds over Germany’s Bund increases, it suggests a potential increase in the credit risk premium of holding French sovereign bonds.

Since the outcome of the second round of the recent summer French snap-National Assembly election on 7 July, the 10-year yield spread of France’s sovereign bonds over Germany’s Bund has continued to inch higher after its prior major bullish breakout that occurred earlier in the week of 10 June 2024 as the election results have led to a hung-parliament in France.

At the start of this week, the far-right National Rally leader Le Pen intensified her party stance to support a call for a no-confidence vote in the National Assembly to remove the incumbent French Prime Minister Barnier over his refusal to tweet his 2025 budget to suit the viewpoints of the National Rally party.

A no-confidence vote may happen as soon as this Wednesday, 4 December, and the French government may topple this week if things go in favour of Le Pen’s National Rally party.

A further increase in the 10-year yield spread of France’s sovereign bonds over Germany’s Bund towards the 0.98% medium-term resistance level may trigger further downside pressure in the EUR/USD and EUR/CHF (see Fig 1).

EUR/CHF’s last line of defence stands at 0.9255

Fig 2: EUR/CHF medium-term & major trends as of 3 Dec 2024 (Source: TradingView, click to enlarge chart)

The current price level of the EUR/CHF is being traded at 0.9320 at this time of the writing, just a whisker above the 0.9255 key intermediate support in place since its 29 December 2023 swing low.

The weekly MACD trend indicator has continued to inch downwards below its zero centreline which suggests a persistent major downtrend that increases the odds of a major bearish breakdown on the EUR/CHF (see Fig 2).

Watch the modified 0.9565 key medium-term pivotal resistance (also the 200-day moving average) and a break below 0.9255 with a weekly close below it may see fresh multi-year lows on the EUR/CHF to expose the next supports at 0.9085 and 0.8890 in the first step.

On the other hand, a clearance above 0.9565 negates the bearish tone for a squeeze up to revisit the 1.0040/1.1000 long-term pivotal resistance zone (also the upper boundary of the long-term secular descending channel in place since the April 2018 swing high).

Source: ACTIONFOREX

(Dec 3): Swiss inflation accelerated slightly after retreating for three months, sustaining the case for a Swiss National Bank (SNB) interest-rate cut next week.

Consumer prices rose 0.7% from a year ago in November, Switzerland’s statistics office said. That’s in line with the median estimate in a Bloomberg survey of economists and just above October’s 0.6%.

Costs for rents increased, as did prices for clothing and air transport, while cars, fruit and vegetables incurred lower charges, according to a statement. The core reading — excluding fresh and seasonal products as well as energy — also ticked up.

The SNB is widely expected to deliver a fourth consecutive rate cut on Dec 12 as the strong franc deflates the prices of imports. Policymakers have highlighted that inflation is “comfortably” in the central bank’s 0-2% target range, and Tuesday’s reading marks the third month it’s been below 1%. 

As consumer-price growth has so far predominantly been driven by rents, the expected drop of a key reference rate influencing them is set to trigger a slowdown from around mid-2025. In addition, January will see electricity price cuts of on average 10%, according to the government. The Swiss system features highly regulated energy costs for households, with bills being adjusted only once a year.

“For the SNB, which has become increasingly concerned about inflation sliding toward the lower end of its 0% to 2% target, this temporary increase won’t offer much relief. Combined with slowing growth, a clouded outlook for the export sector and upside risks to the franc against the euro in a context of heightened political uncertainty in France and Germany, we see the SNB cutting rates again by 25 basis points each in December and March,” said Maeva Cousin, senior economist at Bloomberg Economics.

SNB president Martin Schlegel also said last week that economic weakness at key trading partner Germany weighs on Switzerland’s industry. This could further add to the case for another rate reduction.

Economists currently expect the central bank to cut twice more, taking down its key rate to 0.5% by March from the current level of 1%. Some observers also deem a drop to 0% possible, given that Schlegel has repeatedly highlighted negative borrowing costs remain in the toolbox if they become necessary for price stability.

Switzerland has one of Europe’s lowest inflation rates. Data from the euro area showed consumer prices there rose 2.3% from a year ago in November. Based on the European Union’s harmonised measure, the Swiss saw an advance of 0.7% in the period.

Source: Theedgemarkets