US data mixed but bond markets remain sceptical; China PMIs expand; French bond risk leaps; Australian inflation rises but building consents fall; global air travel dips; UST 10yr at 5.30%; gold holds and oil falls further; NZ$1 = 56.3 USc; TWI-5 = 60.1

Luxury beliefs.

"In an unusual sign of times, The French government now pays more for its debt than French titan LVMH does"

https://x.com/Valen10Francois/status/2105232265257095436

August PCE inflation came in at 3.4% and lower than expected. Personal disposable incomes rose +4.8% in August

BS.

David's breakfast headline really hit me on reading it this afternoon...

"French bond risk leaps."

The Banking Dominoes I Worried About Years Ago Are Still Sitting There

Why - because these bond-market numbers reminded me of an exercise I ran several years ago which stayed firmly lodged in the back of my mind.

I took the world's largest banks by market capitalisation and ignored, for a moment, the comforting alphabet soup of regulatory capital ratios. Instead I asked a much simpler question - how much actual balance-sheet equity was sitting underneath their total assets?

The results were fascinating, and two banking systems particularly bothered me.

France and Japan.

France immediately jumped off the page.

Today BNP Paribas has roughly €138 billion of shareholders' equity supporting more than €3.08 trillion of assets - around 4.5%. In other words, something approaching €22 of assets for every €1 of equity.

Société Générale remains in much the same territory - its regulatory leverage ratio was only 4.47% at the end of 2025, despite its much healthier-looking CET1 ratio of 13.5%.

Then there is Japan.

MUFG - about 5.2% equity/assets.
SMFG - about 5.0%.
Mizuho - only about 3.8%.

Mizuho therefore has something approaching ¥26 of assets sitting above every ¥1 of shareholders' equity, while simultaneously reporting a perfectly respectable-looking 13.51% CET1 ratio.

That discrepancy is precisely why I did the exercise in the first place.

I wasn't trying to predict which bank would fail. I was trying to identify where the leverage was hiding before something went seriously wrong.

My conclusion back then was that, if another global banking domino event ever developed, France was one of the places I would watch very closely, with Japan uncomfortably close behind.

Fast-forward to today and that old exercise suddenly looks rather less academic.

French government debt is now being repriced brutally. The French 10-year OAT spread over the German Bund has pushed to around 120 basis points - territory not seen since the 2011 euro crisis - while France is preparing a record €340 billion of borrowing in 2027. France's public debt has now reached 119% of GDP, or roughly €3.6 trillion.

And sitting underneath this deteriorating sovereign is precisely the banking structure that worried me years ago.

Regulatory CET1 ratios look considerably healthier than those raw equity numbers, of course, because they are calculated against risk-weighted assets rather than the entire balance sheet.

That distinction becomes rather important when supposedly low-risk sovereign assets themselves begin being repriced.

Then Look East

Japan's 10-year government yield has now reached around 3% for the first time in three decades, and Japanese banks themselves are warning that continuing increases in JGB yields could produce write-downs and realised losses.

Japan's 10-year yield rose an extraordinary 42 basis points during the September quarter - its largest quarterly increase in more than twenty years.

And lo and behold, Orange King Don has thrown an energy crisis into the mix.

The prolonged Middle-East conflict has driven energy costs higher and simultaneously complicated the job of central banks - weakening economies while putting renewed upward pressure on inflation and bond yields. The Banque de France itself describes the Hormuz disruption as a negative supply shock and has raised its inflation projections accordingly.

That is a particularly unpleasant combination for heavily indebted sovereigns and highly leveraged banking systems.

Sovereign risk and banking risk do not live in separate universes.

The banks own sovereign debt. Governments ultimately stand behind banking systems. Central banks stand behind liquidity. And financial markets price all three.

That circular relationship looks wonderfully stable - right up until confidence in one corner of the triangle begins to disappear.

None of this means BNP, SocGen, Mizuho or anybody else is about to fail tomorrow. Banks have liquidity buffers, regulatory capital, central-bank facilities and very different asset structures, so a simple equity ratio cannot predict insolvency.

But that wasn't the point of my exercise then, and it isn't the point now.

The point was to identify where the leverage was sitting before the stress arrived.

During the GFC we discovered what happens when supposedly safe assets cease being safe, liquidity disappears and highly interconnected TBTF institutions discover that a thin equity cushion can disappear remarkably quickly.

Today France has one of the developed world's most visibly stressed sovereign bond markets, Japan is undergoing a historic repricing of its own government debt, both banking systems remain heavily leveraged on an unweighted balance-sheet basis - and an energy shock is pouring additional pressure into the bond market.

I don't have a clue which domino eventually falls first.

But I find it rather difficult to ignore the fact that two of the dominoes I circled years ago are now wobbling at precisely the same time.

And there would be a rather tragic historical irony if the next great systemic financial crisis really did begin in France.

The phrase famously attributed to Marie Antoinette - "Let them eat cake" - was almost certainly never uttered by her, but it survived because it came to symbolise something much larger - an increasingly detached ruling establishment, mounting financial distress, an overburdened state and ordinary people discovering that the economic arrangements above them were no longer working.

I am certainly not suggesting modern France is 1789. But the historical echo is difficult to ignore.

France today combines enormous sovereign debt, persistent fiscal deficits, political strains, six prime ministers in five years, an ex-Rothschild investment banker acting as President, a bond market demanding an increasingly uncomfortable price for financing the state, a debt-to-GDP ratio of 119%, and some of Europe's largest TBTF banks sitting on balance sheets many times their ordinary equity...

Blimey - I almost ran out of breath.

Add an external energy shock and the ingredients become considerably more combustible - financially and socially.

These are not little banks.

They are TBTF.

And the uncomfortable lesson from 2008 is that TBTF does not mean cannot fail - it means cannot be allowed to fail alone.

If the next great domino event really does begin in France, history will have supplied one hell of a metaphor.

Let them eat cake, indeed.