News of the week summary - 30/04/2023
Fitch downgrades France’s credit rating.
Fitch has downgraded France's credit rating to
AA- (the 4th highest rating) from AA with a stable outlook, aligning
it with countries like Ireland and the Czech Republic. This downgrade is the
first by a major rating agency since President Emmanuel Macron took office in
2017. The move comes amid Macron's unpopular attempts to reform the pension
system, resulting in protests and political fragmentation.
Despite acknowledging that the pension reform
could generate annual savings of 18 billion euros by 2030, Fitch also warns of
increased political opposition and the risk of a more expansionary fiscal
policy. The downgrade raises questions about France's ability to reduce its
public debt.
France's finance ministry unveiled a plan to
lower the budget deficit and control debt last week, relying on economic
growth, labor market reforms, and reduced fiscal support. However, the plan has
faced skepticism regarding its growth projections and inflation forecasts.
Eurozone narrowly escapes recession in the
first quarter.
The Eurozone managed to escape a recession in
the first quarter, with a modest growth of 0.1%. However, it fell short of the
0.2% estimate, which has economists and investors debating the ECB’s potential
interest rate hike. France and Italy rebounded from negative figures at the end
of the previous year, while Spain gained momentum, but Germany stagnated.
Despite the relief of avoiding a recession,
there are concerns about rising inflation in France and Spain. This could
influence the ECB's decision on the size of an interest rate hike scheduled for
May 4th.
The EU’s economy displayed resilience thanks to
milder weather conditions and government support, particularly in light of
Russia's invasion of Ukraine. April surveys indicate strong demand for services
and increased employment, though manufacturers still face challenges.
Germany's economy, Europe's largest, showed
mixed signals. Manufacturing benefited from eased supply bottlenecks and lower
energy costs, while the consumer economy's growth was slower, despite rising
household income.
Portugal experienced a growth rate of 1.6% in
the first quarter, surpassing expectations, supported by exports and an
improved tourism industry.
Hedge Funds massively short US Treasuries
Hedge funds are taking a bet on higher Treasury
yields, reflecting confidence that the U.S. economy can avoid a recession
despite the Federal Reserve's tightening policies to combat inflation. Indeed,
they believe the FED will be able to keep raising rates to combat inflation
without needing to cut them to avoid a recession. Recent data shows that investors
have increased their shorts (bets on the drop in price of a financial asset) on
10-year Treasury futures to a record 1.29 million contracts.
Nevertheless, a survey by JPMorgan revealed
increased both long and short positions by its client, highlighting the uncertainty
around recession risks and the Fed's future actions.
Additionally,
some analysts suggest that the short positions may be inflated by the revival
of basis trades, which involves purchasing cash securities while simultaneously
shorting the corresponding futures contracts to profit from discrepancies in
the pricing between the two markets. The profit is usually small, hence
the massive use of leverage.