This chart depicts the price of Bitcoin over time.

Source: Reuters

China’s latest efforts to convince investors that it will boost its economy with great stimulus measures. On Friday, the Chinese authorities repeated that they will boost consumption but the lack of details reversed the pre-announcement enthusiasm and sent the CSI 300 more than 2% lower. And the Chinese stocks were sold again today on the back of a significant slow down in retail sales growth last month, as confirmation that whatever is done in China is not bearing fruit. Meanwhile, the Chine yields’ nosedive does nothing to motivate investors to come back. That’s a massive problem that reminds investors of Japan which struggled with the famous ‘liquidity trap’ dilemma for decades – where the low rates couldn’t boost consumption and kept the economy in a low gear for decades. 

In Korea, the political turmoil continues to weigh on sentiment, while in France, the relief on the appointment of Francois Bayrou – another very established name in French politics – to replace Barnier as the new French PM was clouded by Moody’s downgrading the French credit rating to Aa3 – three levels below the top. Moody’s blamed the political fragmentation, and Bayrou will probably struggle with the same divided government as his predecessor to pass any budget-healing measures.

Nearby, German politicians will hold a confidence vote to pave the way for a Ferbuary snap election. But the German opposition said that they will maintain their borrowing limit unchanged if they come to power next year – as opposed to the earlier statements from the CDU leader Friedrich Merz about his openness to increase that limit to give more support to the economy – which obviously was not ideal for the budget discipline.

To summarize, nothing is less clear than the political picture in the eurozone’s two strongest economies, so the bets that the European Central Bank (ECB) must do the heavy lifting remains strong after last week’s cautious 25bp cut. The expectation is that the ECB will deliver another 25bp cut in January. But the dovishness is mostly priced in, therefore, the EURUSD should find enough support near the 1.05 mark and re-challenge the 1.06 offers.

Across the Channel, Cable is slightly better bid this morning, but Friday’s disappointing set of data – that hinted at surprisingly worse industrial and manufacturing production topped with surprisingly soft services – warned again that the British economy will see the backdrops of tax increases before it starts seeing the benefits of spending. The Bank of England (BoE) is expected to maintain its rate unchanged this week, to make sure to balance out the government’s spending plans, but some officials could sound dovish on the back of weak growth numbers. As per sterling, the selloff could slow on the back of a cautious BoE and an unnecessarily soft Federal Reserve (Fed). But the dream of seeing Cable end the year above the 1.30 is melting by the day.

In Japan, the USDJPY is gaining traction to the upside as investors trim their bets for a Bank of Japan (BoJ) rate hike this week. Some officials had said earlier this month that waiting for the next hike would make little sense – a hawkish risk that should cap the USDJPY’s ascent near 155 into the decision.

In the US, the Federal Reserve (Fed) is expected to trim its rates by another 25bp when it meets this week. Last week’s CPI print was eventless, and the jump in the PPI number was mostly wiped out – as egg prices were mostly responsible for the uptick. What the Fed will announce about the next meetings will probably matter more than this week’s cut. On one hand, Powell recognizes that the US economy and jobs market remain resilient. On the other hand, Trump’s pro-growth policies and tariffs could boost inflation again. So, on both hands, there is nothing that justifies the continuation of regular cuts in 2025.

The S&P500 closed last week near record while Nasdaq advanced to a fresh record high on Friday. This time, it was Broadcom’s turn to shine. The company’s stock price jumped 24% to a record high on Friday after announcing better-than-expected earnings and saying that it expects a booming demand for their custom-made AI chips. Remember, Broadcom and Apple announced to build a chip together a day before. Tech companies’ willingness to build their own chips could be a opening for companies like Broadcom in the AI race – if they succeed in delivering strong, custom-made and cheaper solutions and threaten Nvidia’s share of pie. Nvidia’s ecosystem of software, tools, and AI research infrastructure remains a powerful defense, but its high valuation raises questions.

Source: ACTIONFOREX

Source: Euronews

Political uncertainties that had plagued Korea have eased somewhat following the passage of an impeachment motion against President Yoon Suk Yeol at the National Assembly over his failed imposition of martial law. However, concerns about economic volatility remain.

There is a growing consensus that the country's growth forecast for next year, already downgraded due to uncertainties surrounding the influence of former U.S. President Donald Trump’s policies following his return to the White House, could decline further to the 1 percent range due to the impact of the impeachment crisis.

The government pledged stable state management after the impeachment motion against Yoon was passed on Saturday, emphasizing that the economic impact during previous impeachment crises — when the Assembly passed motions against former presidents Roh Moo-hyun in 2004 and Park Geun-hye in 2016 — was limited.

However, in the two previous impeachment crises, the negative impact of political turmoil on the economy was largely mitigated because economic policies continued to be pursued independently. Moreover, external factors played a significant role in supporting economic growth — China’s rapid expansion in 2004 and a thriving global semiconductor market in 2016 both provided strong tailwinds that helped drive exports and sustain Korea's economic growth momentum.

This time, however, the situation is different.

Current cabinet members, including Prime Minister Han Duck-soo and Finance Minister Choi Sang-mok, are facing criticism for failing to prevent the president’s martial law plan despite having prior knowledge of it. This has tarnished their leadership and weakened the momentum for advancing crucial economic policies.

Adding to the challenges are deteriorating trade conditions, such as the anticipated high-tariff policies under the incoming Donald Trump administration and China’s slowing growth.

This is leading to predictions that shockwaves from Yoon’s impeachment, combined with the prolonged slump in domestic demand and other internal and external factors, could be greater than expected.

U.S. President-elect Donald Trump gestures to attendees at the Army-Navy football game in Maryland, Saturday. Reuters-Yonhap

The primary obstacle currently facing Korea’s financial and foreign exchange markets is the weak value of the won against the U.S. dollar, which stands in the 1,400 range against the greenback. Following Trump’s election victory, the strong dollar trend is expected to continue, with most forecasts predicting that the exchange rate will remain within this range through the first half of next year.

A depreciation of the won drives up import prices, potentially triggering a vicious cycle of high inflation and elevated interest rates.

Given Korea’s low food self-sufficiency rate and reliance on imported raw materials like flour and cheese, rising prices of these goods could place additional strain on household expenses.

This makes it increasingly difficult for the Bank of Korea (BOK), which prioritizes price stability, to implement a further rate cut to stimulate the economy.

The ongoing situation increases the likelihood that the country’s already downgraded growth forecast, impacted by Trump’s return to power, could decline further.

Even before the martial law fiasco, Korea’s growth forecasts by major research institutions had already been revised down to around 2 percent, signaling an increasing likelihood of low growth in the 1 percent range next year.

The figures, announced between the U.S. presidential election on Nov. 5 and Yoon’s martial law announcement on Dec. 3, include 2 percent from the Korea Development Institute, 2 percent from the Asian Development Bank, and 1.9 percent from the BOK.

“Given the current situation, next year’s growth rate is expected to be further downgraded by at least 0.1 to 0.2 percentage point,” Kim Gwang-suk, a senior researcher at the Institute for Korean Economy and Industry, said.

Global investment banks are also perceiving the domestic political situation as a negative factor that could constrain next year’s growth rate.

“We maintain our below-consensus growth forecast of 1.8 percent for 2025, yet with risks increasingly skewed to the downside,” Goldman Sachs said in a report issued on Dec. 9 and authored by Kwon Goo-hoon, senior Asia economist and managing director.

Against this backdrop, the BOK stressed the need for more proactive measures in response to the economic situation.

“If key financial and economic policies, including supplementary budgets, are smoothly carried out through cooperation between the ruling and opposition parties as well as the government, and if trust is built in the economic system’s ability to operate independently and normally, the impact on the economy will likely be limited,” the central bank said in a report on Sunday.

Source: Koreatimes

In focus today

Today all eyes are on the euro area December flash PMIs as the very large decline in November caused significant market moves. There was nothing positive in the November report where the services PMI fell below 50 to 49.5 for the first time since January, and the manufacturing PMI remained stuck at 45.2. We expect the economic situation to be little changed since November and forecast negative quarterly GDP growth in Q4. We thus expect the PMIs to decline slightly in December to 44.9 in the manufacturing sector and remain at 49.5 in the service sector.

We also receive the flash PMIs for November from the US and UK later in the day.

In France, the National Assembly will debate a “special law”, which will allow the 2024 budget to be rolled over to 2025 to avoid a government shutdown. The National Rally has said that it will support the law, thereby allowing the current caretaker government to manage minimal state expenditures until a new government is formed. While it is our base case that the law will pass there is a risk that it is not passed, which will increase uncertainty in French politics. In this case, President Macron will need to use an unprecedented law by the constitution to pass budgetary measures without going through Parliament.

Economic and market news

What happened overnight

In China, activity remains weak as retail sales for November came in weaker than expected at 3.0% y/y (consensus: 5.0%, prior: 4.8%). Coupled with Chinese credit growth slowing and money supply growth posing a drag with M1 at -3.7% y/y, albeit up from -6.1% y/y in October, the data highlights the need for more stimulus from Chinese authorities. Chinese equities edged lower on the data releases out overnight.

What happened since Friday

In France, the veteran centrist politician Francois Bayrou was appointed the role as prime minister on Friday. Barou is a long-term ally of president Macron as head of the centrist Democratic Movement (MoDem). Barou has the tacit support from the far-right national rally who said they will not back a no-confidence vote against him by default. However, while the prime minister is new, he will face the same old hurdles as Barnier given the highly divided National Assembly. Because of this, markets did not react to the announcement on Friday. Additionally, Moody’s downgraded France to Aa3 from Aa2 over the weekend since the outlook of the country’s public finances will be substantially weakened over the coming years.

In the UK, monthly GDP for October surprised to the downside at -0.1% m/m (cons: 0.1%, prior: -0.1%). There is likely some negative sentiment effects from the Autumn statement as flagged by the past PMI reports. The downside surprise is broad-based but in particular driven by industrial and manufacturing production affected by weather disruptions.

Equities: Global equities were lower on Friday and throughout last week, though we are talking about smaller movements alongside some indications of Christmas trading commencing, despite being in a busy period for central banks. The most interesting aspect last week was the bond market, with yields rising across all five days. Nevertheless, equities reacted only marginally to the movement in bonds. Growth and technology sectors performed well, despite the increase in yields, while small-cap stocks lost almost 1% relative to large-cap stocks last week. In the US on Friday, the Dow fell by 0.20%, the S&P 500 remained unchanged, the Nasdaq rose by 0.1%, and the Russell 2000 declined by 0.6%. Most Asian markets are in the red this morning. European futures are also lower, while US futures are slightly positive.

FI: It was another eventful week in the European fixed income market given the bearish reaction to the ECB meeting last week and the unexpected downgrade of France from Moody’s from Aa2 to Aa3. The 2Y and 10Y EUR swap rates rose some 10bp after the ECB meeting despite the dovish tone from Lagarde.

FX: Last week saw a generally stronger USD, only NOK outperformed, while we found JPY and CHF at the bottom. USD/JPY was rejected at 150 and instead closed the week 2.5% higher at above 153.50 as US yields soared. Meanwhile, EUR/USD gyrated between gyrated between 1.0450 and 1.0600, just to close the week around 1.0500. The CHF weakened after the surprise 50bp rate cut. EUR/CHF soared to a 1M high. EUR/SEK remained within a tight range just above 11.50. EUR/NOK dropped from 11.80 to around 11.70. This week, the central bank takes centre stage with five rates decisions within 17 hours on Wednesday and Thursday.