ECB dovish; French politics; defence spending to rise?

Investors appear to have interpreted Christine Lagarde’s comments yesterday, and the subsequent leaks to the media, as more hawkish than expected. But we remain convinced that the ECB will cut interest rates significantly next year, and further than investors anticipate. Meanwhile, France has a new prime minister but the country’s fiscal problems look as big as ever. And reports this week suggest that pressure on public finances across Europe could lead to joint borrowing to fund extra defence spending. Next week, Germany’s government is set to lose a vote of no confidence, and we expect the Riksbank to cut interest rates again.