Equities shrug off political upheaval
France was thrown into political disarray when its prime minister resigned following a no-confidence vote. The Franco-German 10-year yield spread hit its widest level since 2012 (the days leading up to Mario Draghi’s famous “whatever it takes” pledge to save the euro). Remarkably, French bond yields even surpassed those of Greece; it’s shocking how investor sentiment around sovereign risk has evolved over the last decade. Yet, in classic market fashion, the CAC 40 index (a benchmark of 40 of the largest French companies) barely flinched and even managed a solid week. This was yet more proof that politics often matters less to stocks than some may think.
However, this political chaos was nothing compared to what happened back east. South Korean president Yoon Suk Yeol declared martial law during a heated political standoff, only to rescind it hours later because of widespread criticism. The opposition Democratic Party announced plans to pursue impeachment and treason charges against Yoon, adding to the uncertainty. In response, the Bank of Korea pledged to boost short-term liquidity and actively manage currency markets to stabilize the situation.
On the economic front, there really is no other country like the U.S. Its November ISM Manufacturing Index came in at 48.4, beating expectations of 47.5 and marking its best month since June. Notably, the new orders sub-index, at 50.4, showed growth for the first time since March. These stronger-than-anticipated figures lifted broader growth expectations, with the Federal Reserve Bank of Atlanta’s GDPNow model projecting an impressive 3.2% annualized pace for the final quarter of the year, its highest estimate so far in 2024.
In his latest remarks, U.S. Federal Reserve (the Fed) chair Jerome Powell tempered expectations for immediate rate cuts while acknowledging the surprising resilience of the U.S. economy.
“The economy is strong, and it’s stronger than we thought it was going to be in September,” Powell said. “The downside risks appear to be less in the labour market, growth is definitely stronger than we thought, and inflation is coming a little higher. So, the good news is that we can afford to be a little more cautious as we try to find neutral.”
With the Fed viewing inflation and growth risks as evenly balanced, Powell signalled that policymakers are focused on finding the neutral rate; neither accelerating nor slowing the economy. This neutral stance, combined with stronger economic data, has driven expectations for an even stronger U.S. dollar moving forward.
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