5 things to start your day: Europe

Good morning. Middle East tensions spark gains in oil and gold. France bites the budget bullet. UK Prime Minister Keir Starmer heads to Brus

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Good morning. Middle East tensions spark gains in oil and gold. France bites the budget bullet. UK Prime Minister Keir Starmer heads to Brussels.  Here's what people are talking about.

Iran tensions

Oil advanced and gold held near a record high after Iran fired a barrage of missiles at Israel, causing Middle East tensions to flare up. The Israel Defense Forces said many of the missiles had been intercepted as Prime Minister Benjamin Netanyahu vowed to retaliate. The broad risk-off mood came as traders awaited further clarity over Israel's response. Meanwhile, Hong Kong shares overcame cautious risk sentiment, extending a stimulus-induced rally as traders returned from a public holiday, driven by optimism about China's economy and attractive valuations. However, gains eluded equities in Japan and South Korea, which were held back by more cautious sentiment.

French budget

Prime Minister Michel Barnier delayed a target date to bring the budget deficit within the European Union limit by two years. France will now aim to bring the gap within 3% of economic output by 2029 instead of 2027, the new premier said in his first address to lawmakers to set out his policy priorities. His plan includes spending cuts and tax hikes for the wealthy and large companies. Repairing France's public finances is a core challenge for Barnier, whose premiership is tenuous given his centrist coalition doesn't have the numbers to ward off a concerted opposition attempt to topple the government. Investors have been dumping French assets in recent months, with the risk premium on the country's debt approaching its highest level since the euro-area crisis.

SNB intervention?

The Swiss National Bank can intervene in currency markets if required and stands ready to lower interest rates again, according to new President Martin Schlegel. "Our main instrument is the policy rate — but we're not excluding to be active on FX markets," he said in his first speech as SNB chief on Tuesday. The central bank last week reduced borrowing costs for a third straight meeting and signaled that more easing may follow. While not pre-committing to further cuts, Schlegel had told Bloomberg Television that such moves are "likely."  Meanwhile, the franc has been rallying and some analysts believe it may reach the strongest level in almost a decade. Schlegel said that the "for the competitiveness of Switzerland the real exchange rate is relevant, not the nominal one."

After Brexit

Prime Minister Keir Starmer's trip to Brussels today will be his first real foray into forging a new post-Brexit relationship with Europe, a process expected to take months, if not years amid competing priorities. Starmer will hold his first meeting in the Belgian capital with European Commission President Ursula von der Leyen since sweeping to power in July. Starmer's Labour, in power for the first time since 2010, is trying to repair the damage to the UK's ties with the bloc caused by years of fractious negotiations over Brexit. To signal a significant shift in relations, Britain and the EU are looking to hold their first bilateral summit next year, according to people familiar with the matter. But while the EU and UK are eager to seize upon the positive reset, they have different priorities, suggesting yet more difficult talks lie ahead.

Lazard's journey

It was the kind of job the bankers working out of Lazard's Paris office were known for: fly into a country drowning in debt — in this case, Zambia — and help rescue it from financial ruin. For decades, Lazard dominated these developing-world restructurings. Just about anytime a hard-pressed government fell hopelessly behind on bills, a few dozen bankers would arrive, usually with Lazard's team at the center. But the negotiations over Zambia's $13.4 billion debt would mark a turning point for emerging ­markets turnaround specialists. The rarefied world of government debt restructuring is getting tougher for everyone — even Lazard, a 175-year-old company whose executives played a role in financing the California gold rush in the 19th century, saving New York City from near bankruptcy in the 20th and restructuring Greece's debt in the 21st.

Coming up

Today, we expect euro zone August unemployment, the BOE's PFC minutes, and US mortgage applications and September employment change. And there is a strong lineup of central bank speakers including the ECB's Guindos, Kazaks, Simkus, Elderson and Schnabel, and the Fed's Hammack, Musalem, Bowman and Barkin.

What we've been reading

This is what's caught our eye over the past 24 hours. Vance, Walz joust over abortion, immigration flashpoints in debate Apple readies new iPhone SE and iPads for early 2025 release Japan's $4 trillion 'carry trade' begins to slowly unwind Samsung to cut thousands of jobs amid struggles in AI market US dockworker chief aims to make history as election looms Homebuyers drawn to Asheville hit by horror of hurricane Helene Hedge funds pile into China looking for any way to gain exposure

And finally, here's what Simon is interested in this morning

Dovish central banks and stimulus in China are adding to an already very positive liquidity outlook. This is a favorable outlook for stocks, but may also lead to feverish speculation leaving equities even more overvalued. It's the perfect storm. Liquidity conditions were already very favorable, with central banks around the world beginning to loosen policy and money growth beginning to rise. Then the Federal Reserve kicked off its easing cycle with an outsized 50-bp rate cut. That will not only boost money growth in the US, it will also embolden other central banks to cut more. The ECB, for one, has more freedom to cut at its October meeting, as the market now expects it to do. The other game changer is China. Its stimulus measures are poised to boost depressed money growth there, which will have a significant impact on global liquidity. The annual change of G-10 real M1 has been rising sharply. It is still negative, but for the impact on risk assets, it's second derivatives that matter. If we assume only that China's M1 had not fallen over the last year, global real M1 would already be rising year-on-year and turning up strongly. Global real M1 leads the growth in US stocks by about six months. More liquidity is set only to support them further. But there could be trouble ahead. The Nasdaq, S&P, India, Japan and Australia already have forward P/Es of over 20. Too much liquidity could easily lead to FOMO-driven speculation that would leave stocks on increasingly rocky ground. Simon White is a macro strategist for Bloomberg News, based in London.

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