Oct 2 (Reuters) – Global markets are starting to wake up to the reality of borrowing costs at two-decade highs, oil above $100 a barrel and central bank rate hikes, which is heaping pressure on governments, investors and households and eroding some of the AI-driven enthusiasm in equities.
Add to that political turmoil in France, rising volatility, a cloudy rate outlook and an election in Brazil and there is plenty of room for surprises this coming week.
Here is what is coming in financial markets, from Satoshi Sugiyama in Tokyo; Lewis Krauskopf in New York and Alun John, Dhara Ranasinghe and Karin Strohecker in London.
1/ DEJA VU?
France’s beleaguered minority government has presented its 2027 budget bill, which could result in perhaps weeks of wrangling over spending cuts in a deeply divided parliament — just as opposition parties harden their positions before next year’s presidential election.
The tension is palpable.
France’s 10-year bond yield, trading near 5%, has hit its highest since 2002.
On the streets, strikes by students and public sector workers against planned budget cuts aimed at easing pressure on public finances are gaining momentum.
France’s debt as a share of economic output is at a record high of almost 120%. It plans to sell a record €340 billion in bonds next year.
With an election looming, market pain is getting worse. The Bank of France chief says the country cannot count on the ECB to fix France’s debt problems.
That does not mean the ECB is not watching closely.
2/ TIME TO WAKE UP
Currency markets are breaking out of their summer hibernation, with the dollar set to gain and the euro set to struggle.
The dollar index, which tracks the US currency against six others, is up for a third straight week, at its highest in 18 months, confounding bets that 2025’s weakness would continue.
Helping are surging growth, high US yields and elevated oil and gas prices — beneficial for an energy exporter, policy permitting.
The negatives elsewhere are as important; there are reasons to worry for the pound and yen, but the euro stands out.
Heavily indebted euro zone bond markets, such as France, are blowing up, energy costs will weigh on growth, and the combination could limit rate rises.
Not surprisingly, the euro has fallen below $1.13 for the first time since May 2025, while volatility and bets on a steeper decline have picked up. But in a sign of broader weakness, it has also fallen on the pound, the yen and the Swiss franc.
3/ SAMBA, SLOGANS AND FISCAL REALITY
Brazil goes to the polls on Sunday in a vote that will show whether Latin America’s biggest economy joins the rightward political shift seen across much of the region, or carves its own path.
Leftist President Luiz Inacio Lula da Silva is expected to clinch a narrow lead in the first round but is unlikely to win outright, setting up an October 25 runoff. His most likely challenger is Flavio Bolsonaro, son of former president Jair Bolsonaro, whose coup conviction after the 2022 election remains a rallying point for conservatives at home and abroad.
For investors, the stakes are high. Brazil’s elevated interest rates have made the real a carry-trade darling, but they are also squeezing households and businesses and fuelling concerns over growth.
Whoever wins, the next president inherits a fiscal headache and markets remain wary that either camp can put Brazil’s rising debt burden on a more sustainable path.
4/ FED CHECK IN
Investors will seek clues next week about the Federal Reserve’s plans for interest rates on the heels of the US central bank’s first rate hike in three years.
Minutes will be released on Wednesday that cover the Fed’s meeting last month, when it raised rates for the first time since 2023 and suggested more monetary tightening would come before the year is out.
Fed Fund futures heading into the week suggested markets were leaning toward an expectation that the Fed would raise again at the next meeting in October, but such bets have cooled.
Data showed inflation rose less than expected in August, while New York Fed President John Williams said on Tuesday that the central bank had time to weigh economic data before deciding when to hike rates again.
5/ TWO READOUTS ON JAPAN INC
Two key readouts on Thursday will offer a glimpse into how Japan Inc is coping with the energy shock from the Middle East conflict and a weak yen.
First up is the Reuters Tankan, which mirrors the Bank of Japan’s gauge of corporate sentiment and follows its July-September survey showing manufacturers more resilient than non-manufacturers. The data will offer another clue on whether the BOJ will proceed with a back-to-back interest rate hike this month following September’s 25-basis-point increase.
Later that day, the operator of the global Uniqlo clothing chain, Fast Retailing, reports annual results. It serves as a bellwether for consumer spending in Japan and China. While analysts expect another solid performance, investors will focus on its guidance and the impacts of rising energy costs and the weak yen on margins.
(Compiled by Amanda Coopr; Graphics by Mayank Munjal; Editing by Alison Williams)
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