Next year's US presidential race may be about to get interesting:

Until know attention to the US presidential election has been dominated by the large number of Republican candidates, and especially the non-politician politician Trump. Over the past week, it appears Trump may have peaked. On the Democratic side, Senator Sanders has challenged Clinton, few think he is truly electable on a national level. Clinton also has a stronger organization and greater financial resources. However, over the summer Clinton's support has begun weakening, especially in the swing states that are thought to determine the election outcome.

It is increasingly looking as like Vice President Biden is going to enter the race. If so, an announcement would likely come over the next month. October 13 is the first debate among Democrat candidates. Although Biden could afford to skip it, as his name recognition is high, and his office puts him in the news often, it may help raise funds. There are only four debates before the Iowa caucus on February 1. Around the middle of November, there are a number of deadlines to get placed on various state ballots. In some states it is not simply a matter of filling out a form, some require a signature petition. The planning and organization to do this takes at least a few weeks. There is some thought that the Vice President would want to make the announcement before Clinton's testimony about Benghazi on October 22 to avoid the appearance of political opportunism.

Moody's downgraded France to Aa2:

It changed the outlook to stable from negative, completing the cycle.  It cited the weak growth and institutional and political challenges. Moody's also recognized that France's debt is unlikely to be reduced over the remainder of the decade.

The downgrade is unlikely to impact French yields. It matches the ratings of the other two main agencies. It is still seen as well within investment grade status. Over the past three months, the French premium over Germany for 10-year bonds has narrowed 4 bp to 37 bp, while the two-year differential is steady at 4 bp. 

The significance of the downgrade is its reminder that France continues to lag behind Germany. This gap makes the other EMU challenges more difficult.

Europe was previously seen as resting on two pillars, Germany and France. Sometimes it was expressed as the German hand in the French glove. Other times the imagery of a plane with two co-pilots. To be sure, it was not that France and Germany were in agreement, rather than a compromise struck between them was a close approximation of a broader compromise of interests, especially between the creditors and debtors. Few observers seem to appreciate that the failure of France to turn the economic corner has serious political consequences for EMU.

The Socialist government has adopted the UMP (now Republican) program of tax cuts, reductions in social charges (~50 bln euros over three years), cut spending and adopt reforms aimed at making it easier to hire and fire employees. Among its successes, France's Finance Minister Sapin cites the cut in spending from 56.4% of GDP in 2014 to 55.1% next year. Nevertheless, the budget deficit that is projected to be 3.8% of GDP this year is not projected to fall to the 3% Stability and Growth Pact mandate until 2017.

S&P raised Portugal's rating one notch to BB+, matching the rating of the other two main agencies.

The economic recovery and budget consolidation was cited by S&P in explaining its decision. Portugal's rating remains below investment grade, which it lost in 2012. S&P's stable outlook means it is unlikely to regain that coveted spot anytime soon.

Still, Prime Minister Coelho's attempt to run for re-election (October 4) will be support by S&P's decision. Most of the recent polls show a dead heat, though one poll before the weekend showed Coelho's ruling coalition ahead. Portugal has not experienced the social unrest seen in several other crisis-stricken countries, including Greece, Spain, Italy and France. The government expects Portugal to grow around 1.6% this year, with a budget deficit of 2.7%.

China's Caixin manufacturing PMI:

After declining in July and August, it is expected to tick up slightly in September. It will still be below the 50 boom/bust level. However, pessimism toward the Chinese economy may be extreme, and some stability, especially from non-government data sources, be psychologically important. Chinese officials have taken direct and indirect measures to support the economy and some stabilization of the economy should not be surprising.

Just like China shuts down manufacturing output around Beijing or Shanghai for high profile international events, President Xi's trip to the Washington may generate a financial equivalent. Losses below 3000 in the Shanghai Composite, for example, could steal the headlines from a visit between leaders of the two largest economies. The currency has also steadied in terms of level and volatility.

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