Weekly Market Update - 17 December 2024

French President Macron will be hoping not to find any unexpected political crises under the Christmas tree after he named Fran?ois Bayrou as his new Prime Minister.

Bayrou, who is generally considered a centrist in French politics, replaced Michel Barnier, who recently resigned after losing a no confidence vote. Barnier had only been in power for a few months but found it impossible to pass a 2025 budget in the face of opposition from the left and right. Under French law, if no budget is passed, the prior year’s budget is reused, meaning there isn’t an imminent risk of a government shut down.

Bayrou is walking into a challenging environment. The political situation that forced Barnier out remains, and no new elections can be called until mid-2025. On Friday last week Moody’s downgraded France’s credit rating, in the face of a high deficit.

With all these political and economic struggles, it is perhaps not a huge surprise that French equities have also performed relatively poorly this year. However, it is important to remember that markets do not always perform totally in line with broader economic performance.

Looking over the border, Germany provides a recent example of a market performing well in a tough environment. The struggles of the German economy are well known. Yet, year-to-date, the German DAX index is up over 20% and is trading at record highs. It recently broke the 20,000 mark for the first time.

The German market has been supported by gradually falling interest rates, as well as the hope of more to come. Last Thursday the European Central Bank (ECB) boosted these hopes by reducing interest rates by a further 0.25%. This marked the fourth such move in 2024, reflecting lower economic growth projections over the coming years, as well as expectation of a more mundane inflationary backdrop.

Encouragingly, ECB President Christine Lagarde has given strong indications that further rate cuts are likely in 2025: “If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further.”

One fly in the ointment could come from the US, where incoming President Donald Trump has spoken at length about the use of tariffs – which are likely to have an inflationary effect.

Last week, the US Labor Department reported that consumer prices rose by 2.7% in November, up from 2.6% in October, highlighting the fact that inflationary pressures remain in the US. That said, despite this small increase, the Federal Reserve is still expected to cut interest rates when it meets later this week.

Turning to the UK, the Bank of England (BoE) is also due to meet on Thursday to discuss interest rates.

Recent economic data revealed that the UK’s economy shrank in October, following a fall in September.

It’s worth noting that the UK economy was generally expected to slow slightly in the second half of 2024, following better than expected growth in the first half of the year.

Commenting on the UK economy, Hetal Mehta, Head of Economic Research at SJP, said: “GDP declined by 0.1% month on month in October, following a fall in September. While that will most likely mean fourth quarter growth is weaker than what the BoE was expecting, forward looking indicators are somewhat better. With credit conditions loosening, interest rates moving lower and increased government spending on its way, the UK economy should experience modest growth next year. Signals from the housing market are a good cross-check and show resilience.”