Outlook
& news.

On Friday, September 12, Fitch downgraded France's sovereign rating from AA- to A+. The agency justified this decision on the grounds of a persistent deficit, public debt already at 114% of GDP and likely to reach 132% in 2034, and chronic political instability. At this level, France is approaching Italy's ratios, which are expected to reach 135%, while diverging from economies such as Spain and Belgium, whose trajectories appear more stable. This downgrade does not place France in a situation of immediate crisis, but it confirms the perception of relative weakness.

•    Disappointing job creations in the US convinced markets that the Fed had to revive the rate-cutting cycle.
•    The ECB, meanwhile, left its rates unchanged. The bank thinks risks to economic growth are now more finely balanced and is more confident on the eurozone's economic outlook.
•    Markets generally shrugged off a number of political and geopolitical tensions.

This formula, attributed to President Carter’s former advisor, Zbigniew Brzeziński, has long seemed irrelevant in a Europe that would like to see itself as “posthistoric”, peaceful, and economically integrated. But reality came crashing down over the last few months, with war returning to the Union’s doorstep, and the need for a strategic awakening. Europe is rediscovering a forgotten truth: if it is unable to defend itself, it shall have neither political sovereignty nor economic independence. Defence is the foundation that determines all the other fundamentals.

The political divide within the National Assembly left little doubt about the fate of the Bayrou government, and even though the latter wanted to believe in it until the end, the vote of confidence ultimately resulted in failure, hastening his resignation and the fall of his government. France thus finds itself in the same situation as last year after Mr. Barnier's departure and is expected to experience its 5th Prime Minister in three years, signaling the significant political instability characterizing the country since the beginning of E. Macron's second term. Faced with an unprecedented tripartition of the political landscape under the Fifth Republic, the president now has three options before him, which we present here in order of most to least likely according to us:

The development of cities has historically been the cradle of major changes, be it technological progress or social, political, economic and cultural progress. And this will be increasingly the case in the future. The city of the future is already taking form. It is greener, more flexible and accessible, automated, focused on technology and innovation, better monitored, and home to the head offices of large companies and a broad array of services. Despite inequality issues, the continued growth of cities could provide numerous attractive investment opportunities. 

•    Despite the current political uncertainty, French government debt is still easily finding buyers, with the France’s treasury department successfully raising € 11bn. 
•    Fiscal risk weighed on the UK’s long bonds, with 30-year gilt yields reaching highs not seen since 1998.
•    US Treasury yields were under pressure this week, as the 30-year bond revisited 5% before poor economic data caused it to fall back.

At the Rimini Meeting, Mario Draghi made a harsh assessment: Europe believed that its economic power was enough to secure its geopolitical role. Recent events (war in Ukraine, tensions with the United States, rivalry with China) have dispelled this illusion. The European Union, a spectator to major upheavals, must transform itself if it wants to defend its fundamental values: democracy, freedom, sovereignty, and prosperity.

On either side of the Atlantic, these past few weeks have been bustling with news. Although we chose not to adjust our allocations in response to these headlines, we did strengthen several of our convictions and have identified new factors calling for vigilance.

The latest issue of ‘Outlook & Convictions’, a publication led by the Global Investment Research Team from Private Banking, in collaboration with our Group’s experts, is now available. 

Jerome Powell confirmed that the Fed would proceed with a rate cut in September while paying more attention to jobs data than inflation when deciding on monetary policy changes over the short term.

The eurozone was penalized by the return of political risk in France, where Prime minister François Bayrou's vote of confidence could bring down the government on September 8.

Japan and emerging countries saw a fall in asset prices, due to profit taking and news on the US import duties.

Edmond de Rothschild has appointed David Claus as CEO of Edmond de Rothschild Asset Management Luxembourg* and Group Head of the Asset Servicing business line.

•    The Trump-Putin meeting did not result in a ceasefire, but it did initiate key discussions on Ukraine, followed by a meeting in Washington on security guarantees.
•    With job creation slowing and inflation picking up in the US, uncertainty surrounds US monetary policy, and J. Powell's statements in Jackson Hole are eagerly awaited.
•    The European economy is proving resilient with a rising PMI index, despite higher-than-expected UK inflation.