KBC Sunset Market Commentary 26/08/2025 via Trader Talent

KBC Sunset

Tuesday, August 26, 2025

Daily Market Overview

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Markets

• One day after calling a no-confidence vote (September 8) in his government, the dies for French PM Bayrou have already been cast. All main opposition parties (stretching from far left over Socialists to the extreme right RN) said that they would vote against the minority centrist government looking for support on their proposed fiscal tightening plans. And while Socialists said that they would still come up with their own, less stringent, budget proposal (think >= 5% of GDP deficit instead of the 4.6% target from Bayrou) ahead of the vote, it’s very unlikely that they’ll be able to gather sufficient support for it, not least because of the short deadline aside from ideological differences. If Bayrou loses the confidence vote he can still stay on as a caretaker PM given difficulties to find a successor in the country’s hung parliament. French political parties are on top wary not get punished in local elections (March 2026) for the current institutional/budgetary crisis. A new parliamentary ballot ahead of year-end is therefore gaining traction as most likely scenario out (?) of this mess. Election polls and the French two-round voting systems suggest no clear winner at the moment, nor left, nor right. With the early October budget deadline rapidly approaching, any caretaker government can vote to prolong the current budget (even into 2026) awaiting more political clarity. The 10-yr French swap spread touched 83 bps this morning, before slightly falling back to 81 bps (from 76 bps yesterday). French stocks underperform (-1.5%), dragging down EU stock markets with them (-0.75%). The country is at risk of falling into single “A” category at credit rating agency Fitch early September. EUR/USD trades up and down between 1.16 and 1.1650 with US president Trump’s call for the resignation of Fed governor Cook (effective immediate) being a new low point in the political campaign which is putting the credibility of the US central bank at stake. US eco data published so far (better core goods orders in July; falling but near consensus US housing prices) didn’t leave a trace on markets. Long end of core bond yield curves underperform today. The damage in Europe is smallest (30-yr flat) with the US 30-yr and UK 30-yr yield (who else?) adding 2.6 bps (2-yr) and 6.8 bps (30-yr) respectively. Later today, the US Treasury kicks off its end-of-month refinancing operation with a $69bn 2-yr Note auction.

News & Views

• In Japan’s next financial year budget draft seen by Reuters, the finance ministry is asking for a record 32.4tn JPY (around $220bn) for debt servicing costs. The numbers are a chill reminder of how the interest rate environment fundamentally changed in Japan and beyond. Japan is carrying a debt load more than twice the size of its economy after decades of very loose fiscal policy that was basically bankrolled by the central bank through quantitative easing and ultralow interest rates. The draft budget now assumes a 2.6% (long-term) interest rate, up from 2% in the current year’s budget and the highest in 17 years.

• The Hungarian central bank (NBH) kept the policy rate steady at 6.5% today. It said that price stability, ie inflation sustainably returning to the 3% mid-point target can only be achieved by ensuring tight monetary conditions given buoyant consumption, volatile commodity prices and strong wage dynamics. Inflation eased to 4.3% in July (4% for core measures) and is expected to remain above the NBH’s tolerance band (3% +1 ppt) for the rest of the year. Household inflation expectations, meanwhile, remained at a high level and the decrease in short-term corporate price expectations slowed last month. The NBH continues to assume economic growth to pick up from next year, thanks to stronger consumption dynamics and increasing exports against the backdrop of a broader European economic recovery. Today’s decision including the hawkish statement was widely expected, resulting in a stoic HUF reaction. EUR/HUF trades marginally weaker on the day around 397.