Political Pivots: France & Japan

Markets this week were shaped by politics, as leadership upheavals in France and Japan produced contrasting investor reactions, reflecting the differing economic and policy implications. This offers a snapshot of how political developments and policy expectations can ripple through global markets.

France

In Paris, the fourth Prime minister since the snap election resigned this week.
Combined with the National Assembly remaining deeply divided, with no bloc holding a majority, fragmentation has made it hard to pass legislation, including the all-important fiscal budget. This could mean that to avoid a government shutdown in January, France could face a temporary “rollover” budget. Essentially, French leadership and their fiscal position is in turmoil, and this has rattled investors.

In terms of the market impact:

Yields (which move inversely to prices) on France’s 10-year government bonds (known as OATs) climbed to around 3.6%, reflecting the ongoing political uncertainty.
French equities fell by 2% at the start of the week but have since fully recovered. The recovery stems from the fact that many of France’s largest publicly traded companies generate a substantial share of their revenue abroad, insulating them from domestic political uncertainty. As a result, the broader Eurozone markets are expected to remain largely unaffected – in fact, European equities have risen for the third consecutive week.
Currency markets and the European Central Bank remain largely unaffected by this political turmoil. Whilst the euro index was down 1.5% over the past five days, we maintain a positive medium-term view that the euro will strengthen despite this.

Japan

Over the weekend, Sanae Takaichi took a surprise victory in the Liberal Democratic Party (LDP) leadership election and is expected to be nominated as Japan’s first female Prime Minister next week. She is expected to favor fiscal expansion and resist premature monetary tightening in her policy. The extent of fiscal expansion depends heavily on the government coalition formed.

In terms of the market impact:

Investor sentiment was positive, with Japanese equities rising 2.5% on Monday and up 8% over the next 5 days.
Expectations of more government spending (fiscal policy) combined with a likely slower increase in interest rates (monetary policy) caused long-term interest rates in Japan to rise. Japan’s government plays a bigger role in shaping interest rate policy than many other countries, which adds to the impact on long term bond yields.
In currency markets, The Japanese Yen weakened against the US dollar largely due to expectations that Japan could be slower to increase interest rates, making its currency less attractive to investors. However, we believe there is notable value in the Yen at current levels.

France vs Japan
Whilst both experienced shakeups in leadership, markets reacted very differently. See the graph below which shows how equity markets reacted in France and Japan, illustrating the diverging investor sentiment for the respective regions:

It just goes to show that markets price in political risk — but not always negatively. The constructive leadership change in Japan lends itself to support fiscal expansion, hence the positive impact in markets. Yet the continued uncertainty France dampens confidence, as investors remain cautious about its ability to deliver stability and pass key fiscal measures.

The Noise

In commodity markets, gold hit another all-time high surpassing $4,000 (c. £3,000) per ounce this week, with its price shooting up over 42% year to date. In fact, gold has hit 45 all-time highs so far this year. One of the main drivers of gold’s recent strength has been Western investors piling into gold-backed financial instruments. Unlike stocks or bonds, gold carries no credit risk and isn’t tied to company earnings, making it a hedge against inflation, currency swings, and market volatility. For investors, the spike serves as a reminder of how market dynamics, rather than fundamentals like earnings, can create rapid price swings in alternative assets like gold.
Global Equity markets have pushed higher this week. This comes despite some investors questioning why markets are proving so resilient. AI enthusiasm and speculation is at an all-time high. Market participants continue to look past the negative noise and focus on the more positive headlines.
Currency markets diverged from the trends we have seen so far this year. The US dollar is up 1.6% relative to a basket of developed peers such as the Euro and Japanese yen this week, following the political turmoil in both France and Japan. This is despite the recent structural depreciation we have seen, though it remains down 8.2% year to date.

The Niche

Keeping on the France vs Japan theme, the 2019 Rugby World Cup in Japan was the most economically successful Rugby World Cup ever, with nearly £4.3 billion generated in economic output.

Disclaimer

The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy and are presented for information only. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.