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Today, French Prime Minister Sébastien Lecornu has resigned after only 27 days in office.
Europe has a growing problem – an ageing population and spiralling welfare costs. This is causing political division and voter frustration.
This is becoming a political hot potato given the levels of immigration. In the past, cuts in defence spending were used to provide funding for welfare services. However, this prop is no longer available and indeed the military is taking a bigger slice of the government spending pie due to Russian aggression.
In the UK, PM Sir Keir Starmer was forced to climb down over plans to rein in the country’s soaring benefits bill. Chancellor Rachel Reeves remains under pressure from bond investors and despite further expected tax hikes in the November Budget, the sensitive issue of welfare spending may well need to be revisited. A glimmer of hope is that at least hospital productivity in England is exceeding target. The plan to modernise the NHS is expected to deliver savings of £17bn by 2028-29.
In France, which has seen the cost of government borrowing soar, there has been fierce opposition to pensions reform which contributed to the current political turmoil. President Macron must now appoint a record eighth prime minister of his eight-year tenure.
The latest European nation to realise that welfare spending is not sustainable in the long-term is Germany. Chancellor Friedrich Merz is set to battle with his centre-left coalition partners after declaring that Europe’s largest economy can no longer afford its generous welfare state. This comes as Germany is launching a €1trillion debt-funded spending programme to modernise its armed forces and repair infrastructure. Enshrined in the country’s constitution since 1949, Germany’s welfare state has grown to one of the world’s largest, accounting for over 31% of its GDP-the highest level on record. The system is creaking and with 16.5million ‘baby boomers’ due to retire by 2026 and only 12.5million young workers set to join the workforce. Keep your eyes peeled, a funding gap is inevitable.
The UK has many problems, but we are not the only country facing major long-term structural challenges.
When the chips are down, you need to make tough decisions. Who’d be a politician?
What have we been watching?
US equities started the fourth quarter as they ended the third, touching another record high despite the uncertainty from the US government shutdown. Historically, markets have tended to take previous US government shutdowns in their stride. The UK’s largest companies and European equities also hit a new record high as focus started to turn to the start of Germany’s €1trillion economic stimulus package.
AI continued to boost Asian equities with Samsung Electronics and SK Hynix hitting new highs on a chip supply agreement with OpenAI. Meanwhile, OpenAI, hit a value of $500bn just three years after launching ChatGPT as a consortium of Asian investors purchased a $6.6bn stake from the company’s employees. Someone else hit a $500bn value last week -Elon Musk became the first person to reach a net worth of $500bn! Japanese equities also hit a record high after the country’s ruling Liberal Democratic Party named Sanae Takaichi as its new leader, positioning the pro-business politician to be Japan’s next prime minister.
The focus for markets remains the US government shutdown, where based on betting sites, the majority view is that it will be resolved within the next two weeks, albeit one-third believe it may last beyond mid-October. Trump appears to be using the shutdown to halt federal funding for infrastructure and energy projects in some Democrat-leaning states! US non-farms payroll data was due to be released on Friday but was not published due to the government shutdown. However, ISM data showed that employment in the US service sector contracted for a fourth month-in-a-row. Meanwhile, the Supreme Court rejected Trump’s demand to immediately remove Federal Reserve (Fed) Governor Lisa Cook from her post. This removes some immediate concerns about the independence of the Fed until January.
Gold hit a record high on news of the US government shutdown. It might also reflect potential escalation in the war in Ukraine. Media reports suggest that Trump is considering providing Ukraine with long range cruise missiles to target Russian oil and gas infrastructure to force Putin to the negotiating table. Meanwhile, Trump has urged mediators to ‘move fast’ as key Gaza peace talks between Israel and Hamas are set to begin.
In the UK, the composite PMI business activity indicator for September fell to a 4-month low of 51.0, below expectations. Gilt yields also edged up as fiscal concerns grew, particularly after Greater Manchester Mayor Andy Burnham, seen as a potential challenger for PM, called for £40bn of additional borrowing to build new council houses.
In Europe, the finalised PMI business activity data for September was in line with the earlier ‘flash’ estimates. ‘Flash’ inflation data was also in line with expectations with core CPI at 2.3%, only modestly above the European Central Bank’s (ECB) target. In France, President Emmanuel Macron appointed a largely continuity cabinet over the weekend which hasn’t impressed opposition parties and today PM Sebastien Lecornu has resigned!
Brent oil slipped to $65 on the US government shutdown which, if prolonged, could slow US economic growth. OPEC+ also announced a further modest increase in oil production from November of 137,000 barrels a day.
Finally, in Alpha Bites DeepSeek – AI’s Sputnik moment we highlighted how America’s AI supremacy was being challenged by China’s DeepSeek-R1. The shares of China’s tech giants such as Alibaba, Tencent and Baidu have soared in value since then and have outperformed their US AI tech counterparts significantly. Chinese investors seem to believe that China is starting to make breakthroughs in AI computing power. Some are calling AI the fourth industrial revolution while others remain to be convinced given the uncertain financial returns given the scale of investment. Either way the US and China are in a technology race, and it looks neck-and-neck!
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