US politics, the outlook for interest rates in Europe and credit tensions reflect dynamics that are at times contradictory. To these issues, Julien Descombes adds the growing influence of artificial intelligence in the markets, where funding requirements and valuations are raising new questions.
What impact could Trump’s defeat in the mid-term elections have on the US fiscal trajectory and long-term interest rates?
Politics currently exerts a significant influence on the markets, but the mid-term elections are not, in my view, the determining factor for US interest rates, inflation or growth. The fiscal trajectory will depend more on US economic growth, the scale of investment in artificial intelligence and monetary policy.
The mid-term elections could, however, affect the administration’s fiscal leeway. A victory for the Democrats, who are set to take control of both houses, is likely to put the brakes on the Republicans’ expansionary agenda. On the other hand, it is difficult to expect any real fiscal tightening in the wake of the election.
The periods leading up to mid-term elections are often accompanied by market turbulence, due to the political uncertainties they generate. Once the results are known, these uncertainties naturally dissipate, which tends to support the markets.
Should the ECB raise interest rates further, given that the credit crunch is already holding back the eurozone economy?
The ECB has much less room for manoeuvre than the Fed. Unlike in the United States, where growth remains robust, the eurozone economy is growing at a sluggish pace. This correspondingly reduces its ability to tighten monetary policy. Nevertheless, we anticipate a further rate rise by the end of the year, in line with current market expectations.
Our scenario differs significantly from the consensus for 2027. We expect a gradual normalisation of inflation, driven in particular by base effects on energy prices and a normalisation of oil prices. Under these circumstances, we expect the ECB to pause, whilst the market is still anticipating two to three rate rises next year. A rate cut towards the end of 2027 cannot be ruled out either, although it is still a little too early to say for certain.
The trend in energy prices will be decisive. An easing of tensions in the Middle East could also accelerate their decline. Finally, the rate rises that have already taken place, and the one we still anticipate this year, will continue to have an impact on the economy.
To what extent might the UK’s return to the EU – which the vast majority of Britons support – alter the trajectory of European equities and the pound sterling?
The UK’s re-entry into the European Union is not yet a working assumption for us, as this scenario remains uncertain. Should it materialise, its effects would likely be positive, both for the pound sterling and for the British and European economies.
The UK’s return would broaden market opportunities for British businesses and strengthen trade with the rest of Europe. Businesses in the eurozone could also benefit. In the long term, this would help to underpin the growth potential of both economies.
However, it is difficult to gauge the consequences for the markets at present. Such a development is unlikely to occur in the short term. Its impact would depend largely on the economic and financial context at the time it took place. We cannot, therefore, at this stage, use it as a criterion for portfolio positioning.
What direction should Christine Lagarde’s successor take with the ECB’s monetary policy, given that energy prices remain high?
The key word is continuity. It is important that Christine Lagarde’s successor does not bring about a break in the conduct of monetary policy, in order to preserve market confidence.
Two challenges will be particularly important for her successor. The first will be to preserve the ECB’s credibility by avoiding second-round inflationary effects. The second will be to reaffirm that price stability remains its absolute priority.
In particular, the ECB will be judged on its ability to defend its 2% inflation target and to anchor inflation expectations. This continuity will be essential to ensuring the clarity of its actions.
Tensions are mounting in the high-yield market, with yields now exceeding 20 per cent in certain segments. Should we be concerned about the risks of contagion?
We must remain vigilant, but these yields in excess of 20 per cent relate to very specific securities and do not mean that the entire high-yield market is in trouble. Above all, they reflect investors’ mistrust of certain issuers presenting a particularly high risk.
These yields are mainly found in the CCC-rated segment. However, this segment accounts for only around 4 per cent of European high-yield indices. Its weighting has actually fallen in recent years, whilst that of higher-quality bonds – mainly BB-rated – has increased. Overall, the level of risk within the indices is therefore lower than it has been in the past.
This does not mean that the risks have disappeared. The most vulnerable companies still need to secure financing, whether from banks or on the private markets. However, we do not currently see any risk of contagion. Such a risk would arise, in particular, if refinancing difficulties were to spread to higher-quality issuers or if investors were to withdraw from certain segments on a lasting basis, making access to finance more difficult for the market as a whole. This is not currently the case.
Anthropic could go public with a valuation of 1,500 billion dollars, whilst its credit profile remains highly speculative. Is the market prepared to finance, at this price, a company whose capital requirements and financial commitments remain considerable?
The point of an initial public offering is precisely to match a company’s funding needs with the market’s capacity to absorb them. For players in the artificial intelligence sector, this is a particularly delicate balancing act. On the one hand, investment needs are considerable. On the other, market prospects and potential returns are also very significant.
Anthropic’s IPO will therefore provide a gauge of how investors assess this balance. After several months during which the market took a very positive view of the artificial intelligence sector, we have seen a more selective approach in recent weeks. It will be interesting to see how this trend plays out during the offering.
A valuation of 1,500 billion dollars implies that investors are anticipating strong revenue growth and the ability, in the long term, to generate returns commensurate with the capital invested. The IPO will reveal the extent to which the market is prepared to factor these prospects into the company’s price.