Euro Autumn: Budget Headaches, Bond Volatility, and Billionaire Trends

As Europe emerges from its scorching summer, it faces a new set of challenges. The European budget season is about to kick off in September and will run through the autumn, which tends to be a nervy affair for euro sovereign bond markets. This year, inflation stoked by the Iran oil shock and the European Central Bank's rate hike in response has added to the market's anxiety.

The situation is further complicated by messy domestic politics in the Big Three euro zone economies, leaving budget-setting fraught. France stands out, with its 2027 presidential election now in view and the real prospect of either a far-right or far-left candidate entering the Elysee after April's vote. Davide Oneglia from TS Lombard thinks there is a real risk this stalls agreement on the upcoming budget, with a chance no budget will be agreed until next year.

Another 0.5-percentage-point rise in the deficit would bring it close to U.S. levels of about 6% of GDP. French 10-year OAT yields are at their highest in 18 years, and high-flying French bank stocks have recoiled. Italy's political landscape and budget process have been more stable in recent years, but Rome may be in for a rougher 2027 as speculation swirls about a general election as early as April.

Germany's politics are no tidier, with Chancellor Friedrich Merz's popularity low and the far-right AfD party polling strongly. If euro bond markets get nervier or global bond-market anxieties overwhelm them, speculation about using the ECB's Transmission Protection Instrument (TPI) to limit excessive intra-euro bond spreads may start to circulate.