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WeekWatch
Stock Take
The French stock market was rocked by renewed political uncertainty last week, after the prime minister Francois Bayrou called a snap vote of confidence for next month.
Bayrou is attempting to pass almost €44 billion in budget cuts to tackle a deficit that hit 5.8% of French GDP last year. However, as his party currently holds just a minority position, he needs the support of another party for the budget to pass. So far, this has seemed unlikely, with opposition parties from the left and right coming out against it.
“Yes, it's risky, but it's even riskier not to do anything,” Bayrou said of his decision.
If he were to lose the vote on 8 September president Emmanuel Macron would be left with a political headache. Another parliamentary election could be one possibility. Macron surprised many when he called a snap election only last year. That election saw his party lose significant seats, contributing to the current issues.
Due to this political uncertainty, French markets fell following the announcement. The CAC 40 (a benchmark for the French stock market), dropped immediately, and ended the week down almost 3%.
At the same time, yields on 10-year bonds rose. As a result, the gap between French 10-year bonds and their German counterparts grew to the widest extent since the snap election held last year. This gap is now close to that between Italian and German bonds.
Commenting on the evolving fixed income story, Greg Venizelos, Fixed Income Strategist at St. James's Place, noted: “This has been going on since Macron started the ball rolling in 2024. There is an argument that most of the risk has been priced in. The worst-case scenario is that they declare elections and then they’ll need to go through the process of building a new government a few weeks down the line. They can still vote an emergency budget in the Parliament, where basically they roll the 2025 budget forward for a year.”
UK banking woes
Bayrou might find a sympathetic ear from Chancellor Rachel Reeves on the issue of deficit woes.
Reeves is also facing difficult decisions, as she attempts to shrink a £40 billion black hole in public finances. The last few weeks have seen several rumours of potential tax rises believed to be under consideration.
On Friday, the Institute for Public Policy Research (IPPR) called on the government to introduce a new tax on windfall profits on banks.
According to the IPPR, such a tax could raise up to £8 billion a year for the Chancellor.
Many high street banks, including Lloyds and NatWest, finished Friday down more than 2% following the proposal.
All this was enough to knock the FTSE 100 back 1% over the week (which was only four days due to a bank holiday). However, this was down from the historic highs it reached on Friday 22 August.
Chinese shares reach 10-year highs
Turning to Asia, Chinese markets are now trading at levels last seen a decade ago, after a period of strong growth. So far in 2025 the Shanghai SE Composite (SSE) index is up over 36%.
2015 was a disastrous year for Chinese shares. The SSE index fell from a high of over 5,000 points in June to under 3,000 in August, as a stock market bubble burst.
Last week was the first time the index has since broken the 3,800 mark.
Explaining the resurgence, Martin Hennecke, Head of Asia & Middle East Investment Advisory & Comms at SJP, said: “China’s rally has been supported by a combination of factors, including highly discounted equity valuations to start with. There has also been strong performance in many sectors extending beyond electric vehicle and AI to high-tech manufacturing, new drug development and other areas that have been less in the spotlight. As well as this, government support measures have been rolled out, covering consumption, further property easing and anti-price-war measures.
“Perhaps one of the most telling statistics to gauge China’s modern manufacturing might is that, according to preliminary data from the International Federation of Robotics released last month, the country’s 2024 market share of global industrial robot installations increased to 54%.”
While Chinese performance has been impressive, it’s worth remembering the international context of its growth. The S&P 500, NASDAQ and FTSE 100 are all also trading at, or near, record highs.
An AI bubble?
Much of this global growth has come from the high expectations placed on the power of AI.
Few, if any, companies can claim to have been as big a beneficiary of this confidence as chip maker Nvidia.
Such is the expectation on Nvidia that its shares fell 3% last week after it released its latest quarterly results - despite revenue beating expectations.
However, Nvidia said it made no sales of its H20 chips into China in the most recent quarter due to the ongoing trade war. At the same time, reports suggested several Chinese companies are developing their own alternatives.
This came less than two weeks after OpenAI founder Sam Altman said he thought investors could be too excited around AI, despite it being the most important thing to happen in a long time.
Comments like this have led to speculation that we are currently in an AI bubble.
Wealth Check
As the Autumn Budget draws nearer, leaks about proposals being considered by the chancellor to fill a growing fiscal black hole have increased. Last week saw reports the chancellor Rachel Reeves was considering charging landlords national insurance (NI) on rental income. Such a move could potentially raise £2 billion a year.
Reeves has a delicate line to walk in the upcoming Budget, as she seeks to balance economic growth with a need to fill a £40 billion hole in the public purse.
Making things more complicated are Labour’s election promises not to increase rates on VAT, income tax or employee NI contributions.
Currently, earnings from pensions, savings and property are largely exempt from NI. However, employers and the self-employed pay NI of 8%. Introducing a NI levy on rental income for landlords could hit more than two million homeowners, according to figures from the Office for National Statistics.
Meanwhile, last month it was reported that Reeves was looking to significantly extend Capital Gains Tax (CGT) to raise funds. The proposals under discussion could see CGT levied on the profits made from the sale of a principal home where it is worth £1.5 million or more. Currently those selling their principal home pay no CGT on any profit made. If introduced, it could replace the existing stamp duty tax.
Adding to unease, there have also been rumours of a possible reduction in the annual gifting allowance, which allows people to pass on money to loved ones free of tax.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
In The Picture
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