WeeklyWatch – Deficit woe dominates Europe
2nd September 2025
Stock Take
French markets shaken by political volatility
Political uncertainty resurfaced in France once again, when Prime Minister François Bayrou announced a snap vote of confidence, which will take place on 8th September. The impact on the markets? Well, it’s certainly rocked the boat.
Bayrou is currently fighting to pass nearly €44 billion in budget cuts which will go towards tackling the deficit that hit 5.8% of French GDP in 2024. But because Bayrou’s party holds a minority position, he requires the support of another party in order for the budget to pass. Opposition parties from both the left and right have voiced their disapproval of the plans, making it more unlikely that Bayrou will rally the support he needs.
Commenting on his reasoning behind calling the snap vote of confidence, Bayrou said:
“Yes, it’s risky, but it’s even riskier not to do anything.”
If Bayrou loses the vote, French President Emmanuel Macron will have quite the political headache. It could result in another parliamentary election – and Macron already surprised many when he initiated a snap election just last year. Macron’s party lost numerous seats which has, in part, contributed to the issues currently being faced.
The resulting political volatility and announcement meant that French markets fell. There was an immediate drop for the CAC 40 (a benchmark for the French stock market), which finished the week almost 3% down.
During the same time frame, yields on 10-year bonds rose. Consequently, the gap between French 10-year bonds and their German counterparts widened to its largest level since the snap election in 2024. It’s now comparable to the gap between Italian and German bonds.
As the fixed income narrative continues to develop, the Fixed Income Strategist at St. James’s Place, Greg Venizelos, stated:
“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 faces more troubles
While he may be struggling for support from fellow French parties, Bayrou would certainly have a sympathetic ear from Chancellor Rachel Reeves when it comes to deficit difficulties.
She faces challenging decisions as she tries to reduce a £40 billion black hole in public finances. Over the last few weeks, rumours have arisen regarding possible rises in taxes that are widely believed to be under serious consideration.
On Friday, the Institute for Public Policy Research (IPPR) requested that the government introduce a new tax on windfall profits on banks. According to them, a tax like this could raise up to £8 billion a year for the Chancellor.
Numerous high street banks, including Lloyds and NatWest, ended Friday down more than 2% after the proposal was put forward.
Unfortunately, this created a bit of a domino effect. The FTSE 100 was subsequently knocked by 1% over the week, which was only four days as a result of the bank holiday, although this is down from the historic highs it reached on Friday 22nd August.
10-year highs for Chinese shares
Turning our attentions to the east, Chinese markets have been enjoying a strong period of growth and are now trading at levels previously seen after a period of growth last decade. In 2025, the Shanghai SE Composite (SSE) index is up over 36%.
Chinese shares did not have a good year in 2015. The SSE index fell from a high of over 5,000 points in June to under 3,000 in August when a stock market bubble burst. Last week, the index broke the 3,800 mark for the first time.
The Head of Asia and Middle East Investment Advisory and Comms at St. James’s Place, Martin Hennecke, explains the revival:
“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%.”
Even though Chinese markets’ performance has been impressive, it’s worth bearing in mind the international context of its growth: the S&P 500, NASDAQ and FTSE 100 are all trading at or near record highs.
AI containment?
A lot of global growth has been as a result of high expectations on AI – and few, if any, companies can claim they’ve benefited from this confidence more than chip maker Nvidia.
The expectation on Nvidia is so high that its shares fell by 3% in the previous week after their quarterly results were released, even though revenue surpassed expectations.
Nvidia stated that they didn’t make any sales of their H20 chips in China over the most recent quarter because of the ongoing trade war. But reports suggest that there are a number of Chinese companies developing their own alternatives.
The news of this came less than two weeks after Sam Altman, OpenAI founder, said that investor excitement surrounding AI was too much, even though it’s the most important thing to happen in many years. It’s comments like this which have led people to believe that we’re currently in an AI bubble.
Wealth Check
Landlord tax rises – are they coming?
We’re edging closer to the Autumn Budget and leaks and suspicions surrounding proposals to fill the increasing fiscal black hole have increased. In the previous week, reports speculated that Chancellor Rachel Reeves was considering charging landlords national insurance (NI) on rental income – an act that could possibly raise £2 billion per year.
Reeves’ challenge
Reeves has a tricky path to tread as she plans the upcoming Budget. Her challenge: to balance economic growth and fill the £40 billion hole in the public purse.
And if that doesn’t seem like a difficult enough prospect, Labour’s election promises included not increasing rates on VAT, income tax or employee NI contributions.
As it stands, earnings from pensions, savings and property are widely exempt from NI. Employers and self-employed people pay NI of 8%. According to the Office for National Statistics, if an NI levy is introduced on rental income for landlords, it could impact more than two million homeowners.
Last month, reports said that Reeves was seeking to significantly extend Capital Gains Tax (CGT) in order to raise funds. The proposals that are being discussed could result in CGT levied on the profits made from the sale of a principal home where it’s worth £1.5 million or in excess of. At the moment, those selling their principal home don’t pay any CGT on profit made. If this is introduced, it could replace stamp duty.
Also contributing to the unease are the rumours of a potential reduction in the annual gifting allowance, where people can pass money on to loved ones tax-free.
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
It’s been a strong year for Chinese equities, having reached levels last seen in 2015. Their performance has been boosted by a number of factors, including government support, attractive values and strong performance by multiple companies across several industries.
Please note it is not possible to invest directly into the Shanghai Composite Index and the figures shown do not take into account any charges applicable to the appropriate investment wrapper or any relevant tax charges.
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SJP Approved 01/09/2025