Market Update – 4th December 2024.

In October, Eurozone unemployment remained at a record low of 6.3% for the third consecutive month. A closer look at the figures shows Spain leading with the highest unemployment rate at 11.2%, while Germany reported one of the lowest at 3.4%. Notably, this data coincides with wage growth in Q3, which reached a multi-year high and suggests that labour market dynamics are still contributing to upward inflationary pressures within the region. This data also reinforces expectations that the European Central Bank (ECB) will approach interest rate cuts cautiously in their upcoming meeting this month, with markets now anticipating a reduction of 25 basis points instead of 50.

Despite the strength in the labour market, Eurozone manufacturing activity continued to contract, with the Purchasing Managers’ Index (PMI) falling to 45.2 in November from 46.0 in October – marking a deeper slump in the sector.

In France, Prime Minister Michel Barnier faces backlash over a budget proposal featuring spending cuts to address overspending and debt. Opposition from the National Rally prompted Barnier to invoke Article 49.3, a tool which allows the government to adopt the budget without parliamentary approval. The move has escalated tensions, with a vote of no confidence expected to be called in the coming days.

The uncertainty weighed on financial markets, reflecting investor concerns over France’s fiscal outlook and the political gridlock surrounding its economic policies. In early Monday trading, the CAC-40 index shed 1.2%, while bond markets also reacted sharply: the yield on France’s 10-year sovereign bond jumped to 2.89% while the spread between French bonds and the German benchmark widened.

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Chinese companies are pushing back against the latest US restrictions on chip production, asserting they can sustain output thanks to stockpiled equipment. Some firms also plan to substitute domestic materials to mitigate the impact of the export restrictions, which target 140 entities. Despite the measures, chip-making stocks showed little reaction, as the new curbs were less severe than investors had anticipated. In response, China has announced a ban of exports to the US of key minerals that could have potential military applications.

On Tuesday, South Korea’s President Yoon Suk Yeol attempted to impose martial law, citing threats from North Korea. Critics, however, argued the move was an attempt to evade impeachment over scandals and mounting domestic pressures. Lawmakers protested by storming the National Assembly, ultimately forcing Yoon to reverse his decision. By Wednesday morning, a motion for his impeachment was in progress. The political crisis triggered a sharp selloff in South Korean markets, with the currency plunging to a two-year low before stabilising on Wednesday. Meanwhile, US markets showed resilience – muted in the face of the unrest, with some market participants even seeking haven in US treasuries in response.

Still to come this week we have speeches from both US Fed chair, Jerome Powell, and Bank of England governor, Andrew Bailey. We also have data on Eurozone PPI, retail sales and GDP, US jobs data and US consumer sentiment.

Nicola Tune, Portfolio Economist