European Markets Set for Higher Open as Defense Stocks and Global Optimism Fuel Momentum

The U.K. government borrowed more than it had planned to in the first six months of its fiscal year, cementing expectations that the government will next month announce fresh tax rises and some spending cuts in an effort to put a lid on its large debt.The Office for National Statistics Tuesday said the government borrowed 20.2 billion pounds ($27.08 billion) in September, bringing the total for the first half of the year to 99.8 billion pounds, above the 92.5 billion pounds projected by the Office for Budget Responsibility in its March forecasts.

The overshoot has raised expectations that Treasury Chief Rachel Reeves will announce new measures to contain borrowing when she presents her budget to parliament on Nov. 26. In recent media interviews, she has signaled that tax rises are likely.For economists, a key goal for the government should be to persuade investors that the government has the will and the policies to start bringing the debt down over coming years.

"Market eyes are on this budget like none we've had for a while," said Jack Meaning, chief U.K. economist at Barclays bank. "The key metric is to be able to create a credible plan that the market buys into and doesn't derail the growth outlook."Compared to other advanced economies, the U.K.'s debt problem is not obviously severe. According to forecasts from the International Monetary Fund released last week, its budget deficit is set to be 2.2% of gross domestic product in 2030, much lower than the 7.6% projected for the U.S., or the 6.3% seen in France. Among the Group of Seven large advanced economies, only Canada was expected to be borrowing less.

Looking at the stock of debt accumulated over the years, the U.K. doesn't look to be in the most perilous position. By 2030, the IMF expects the U.K.'s government to owe the equivalent of 105.4% of GDP, with only Germany having a smaller debt-to-GDP ratio among G-7 members. By comparison, France is expected to have debt equivalent to 129.4% of GDP, and the U.S. debt equivalent to 143.4%.However, the U.K.'s borrowing costs are higher than many of its peers. So even though the government's debt is smaller, interest payments are expected to be equivalent to 3.7% of economic output in the fiscal year ending March, compared to around 2.5% for the French government.

"If you are in the financial markets and what you care about is the government's ability to finance that debt, well even if the projections for France look worse than the U.K., there's a lot of room there before France catches up to the U.K. in terms of debt financing costs," said Thomas Pugh, U.K. economist at RSM, a business services firm.Higher interest costs help explain why investors get jittery when government bond yields rise across advanced economies, as they have this year.One of the main reasons for those higher borrowing costs is inflation. While price rises have cooled in the eurozone to around 2%, they remain closer to 4% in the U.K. The European Central Bank's key interest rate, which is a big influence on French borrowing costs, is at 2%, while the Bank of England's key rate is at 4%.

One way to bring borrowing costs down, and save the government some money, would be to lower inflation. The October 2024 budget included a rise in a tax on businesses that economists say helped drive this year's pickup in inflation.This time out, measures that promise to lower borrowing without weakening growth or pushing inflation higher would likely be welcomed by bond investors. But they might not be easy to deliver, given a pre-election pledge that would appear to rule out a rise in income taxes.

Source: TradingView

Historic Election Breaks Political Barriers

A Return to Abenomics and Market Stimulus

Geopolitical and Constitutional Positions Draw Cautious Watch

Turbulent Road to Leadership Highlights Fragile Political Landscape

Source: Reuters

Oversupply Pressures Weigh Down Crude Benchmarks

OPEC+ Supply Strategy Sparks Surplus Concerns

Demand Outlook Deteriorates Amid U.S.-China Trade Strains

Source: Reuters

Modest Pullback Follows Historic Rally

Interest Rate Expectations Remain Supportive

Shutdown-Induced Data Vacuum Complicates Fed Outlook

Geopolitical and Trade Developments in Focus

Silver and Platinum Weaken, Palladium Resilient

Source: Reuters

Japan’s Political Shift and Weak Yen Fuel Market Momentum

Asian Benchmarks Gain on Global Trade Optimism

U.S. Markets Set the Tone with Strong Corporate News

Corporate Earnings and Inflation in Focus

Energy and Currency Markets Show Muted Movement

Source: AP

Sanae Takaichi has just been confirmed as Japan’s first female prime minister. But more important than her gender might be her taste for head-banging — in music and politics.In what has been a rock-and-roller-coaster two weeks, she unexpectedly emerged as leader of the Liberal Democratic Party, swiftly followed by her coalition partner abandoning their longtime alliance. What followed was a flurry of speculation that she might join the very short list of party leaders who never became prime minister. But on Tuesday, she made history after a frantic realignment of governing parties.

One of the few things the world knows about Takaichi is her fondness for heavy-metal music. A former drummer in a group, she's said the likes of Iron Maiden and Judas Priest relieve her stress. She had plenty to deal with over the past 10 days, starting with the rupture with coalition ally Komeito and the brief floating of pretenders ready to snatch a premiership that looked like hers. But she pulled off a turn-it-up-to-11 coup by securing the support of the Japan Innovation Party, known as Ishin, an Osaka-based upstart that commands politics in the city.

That support means Takaichi now assumes the mantle of her mentor, the late Shinzo Abe. Replacing Komeito with Ishin’s superior numbers in both houses of parliament means the LDP is closer to ending an era of minority government, and will need just a handful of lawmakers to pass legislation. And ideologically, Ishin is a lot closer to her LDP. Allowing a loyal partner to leave might have doomed her premiership. But Takaichi, it seems, isn’t playing for a draw — or quietly.Jurgen Klopp, the former Liverpool FC manager, christened his style of intense, high-energy play as “heavy-metal football.” Perhaps, then, this is “heavy-metal politics:” embracing risk, willing to throw out prior notions, and playing at intense pressure.

It’s what the country needs in an era when its traditional ally in Washington is enforcing tariffs and eschewing traditional norms around regional security. But is heavy-metal politics we should expect of the prime minister going forward? Many a Japanese leader has flattered to deceive. If you think it’s going to be plain sailing, then You’ve Got Another Thing Comin’.Markets at least are rocking. Once stocks got the signal that the stimulus-friendly Takaichi was going to make it into office, the Nikkei 225 had its seventh-biggest gain in history on Monday.

At the very least, this isn’t another ashen-faced, gray-suited man in the role, even discounting the novelty of her gender (as Takaichi encourages us to). Her predecessor, the hapless Shigeru Ishiba, seemingly had no goals beyond simply becoming prime minister. I don’t expect the same of Takaichi, who has ambitious beliefs about Japan’s place in the world. Yet she’s recently displayed a level of political flexibility that many, myself included, feared she might not possess. The key to her longevity will be to display that same pragmatism, reining in her more extreme tendencies and allies while pursuing bold policies.

Ishin might prove a good short-term partner for the LDP. But the collapse of the quarter-century Komeito alliance threatens to further destabilize Japanese politics after a series of events, from the assassination of Abe in 2022 to the collapse of the LDP’s faction system, that have already made even midterm forecasting near impossible. The junior partner was a vote-winning machine for the LDP, but Ishin doesn’t have that level of national reach.

Despite not formally joining the Cabinet, Ishin is understandably making demands: reducing the number of members of parliament, social security reform, and pitching for Osaka to be a backup capital — which is at its core an attempt to wrest control of tax revenue out of Tokyo’s hands.Splitting up with Komeito has been likened to two retirees deciding to go their separate ways. The Ishin partnership instead could undergo a “Narita Divorce” — an early-90s joke about newlyweds who go on honeymoon only to find each other so disagreeable they file for separation on arrival back at the airport.

To avoid that, the premier must make the LDP palatable again. The next lower house vote isn’t scheduled until 2028, but she will likely advance that somewhat. In the interim, she’ll need to implement policies that show voters she’s taking their concerns around inflation, immigration and party corruption seriously.In Iron Maiden terms, the cards that Takaichi holds are Aces High. But if she doesn’t turn the LDP around quickly, her term will come to be seen as yet more Wasted Years.

Source: Bloomberg Europe