Overview of Important Midday Developments on May 4

The People's Bank of China has stated its policy stance on the RMB exchange rate. It pointed out that the IMF evaluates the real effective exchange rate and this should not be misinterpreted as its view of the nominal exchange rate. The real effective exchange rate is determined by both the nominal effective exchange rate and the relative domestic and foreign prices, reflecting macroeconomic and structural influences such as the supply-demand relationship within an economy. However, certain opinions intentionally or unintentionally redirect the IMF's external balance assessment to the RMB nominal exchange rate, or even to the RMB/USD rate, using it as an "official basis" for exchange rate criticism. In reality, the IMF's policy recommendations for China primarily focus on actively expanding domestic demand and implementing structural adjustment policies, rather than pushing for RMB appreciation.

(1) France’s enormous budget deficit has pushed borrowing costs to multi-decade highs, and the significance of this turmoil extends beyond just that. (2) France’s budget deficit is expected to reach 5.4% of GDP this year, significantly higher than other EU member states and above the EU’s 3% cap—it’s been unable to balance its budget since 1974. (3) As the population ages, public finances in France, the euro area’s second-largest economy, are likely to come under further strain. (4) Large-scale protests, initiated by students demanding more investment in French high schools, have erupted since last month with unions and teachers joining in. (5) Bond traders have already priced in these factors: the yield spread between French and German 10-year government bonds is around 1.4 percentage points, approaching the highs reached in 2012. (6) According to institutional strategists, during last week’s turmoil the France-Germany yield spread actually widened to its highest level since records began after German reunification in 1990. (7) The strategists also found that the nominal return on French 10-year government bonds is experiencing its worst decade in 223 years; a similarly bad period occurred only when the rolling 10-year calculation still included the violent phase of the French Revolution. (8) French debt is also rising, now reaching about 3.5 trillion euros (approximately $3.9 trillion). During the 2008 global financial crisis, France’s debt-to-GDP ratio was roughly in line with Germany’s and much lower than Italy’s, but now it’s far higher than Germany’s and is closing in on Italy’s. (9) Apart from a temporary spike during the Covid-19 pandemic, Italy’s debt-to-GDP ratio has remained stable for over a decade, while French bond yields are now higher than those of Germany, Italy, and Spain. (10) The French stock market is also under pressure; its benchmark index has underperformed Europe’s other key indices, rising only about 4% since the start of 2024, compared to a rise of more than 30% for the STOXX Europe 600 Index and over 50% for Germany’s DAX. (11) The combination of a fiscal deficit, political protests, and mounting debt is weighing on French assets; market participants are watching the progress of budget negotiations, statements from rating agencies, and the France-Germany yield spread.

Bernstein has lowered the target price of McDonald's (MCD.US) from $295 to $250.