Markets
Risk sentiment turned sour today, both in Europe and in the US. Signs of fatigue were showing up in recent days. Many stock indices hovered sideways near the record highs with higher openings often used as a moment to take some chips off the table. It were Palantir’s earnings released after-market yesterday that ignited today’s broader profit-taking. Q3 results topped analyst estimates and the company even raised its annual revenue outlook. But it received a thumbs down by the market nevertheless, instantly prompting more general valuation concerns. The tech/AI sector proves particularly vulnerable with the likes of Nvidia, Tesla, Amazon, Meta Platforms and AMD all losing ground. Tech index Nasdaq slides 1.6% at the opening bell, the S&P500 is down 1.2%. Europe’s EuroStoxx50 loses around 1% but is off the intraday lows. Risk aversion filters through into bond markets as well, supporting US Treasuries and German bunds. US rates ease 1.4-3 bps in a bull steepening move. Bund yields limit losses to less then 2 bps, the belly outperforming the wings. Gilt yields decline around 2.1-2.7 bps across the curve. UK chancellor Reeves held a pre-budget speech that got picked up by the national broadcasters. It’s very unusual for a chancellor to lift the veil somewhat and doing so suggests she wanted to massage the public into swallowing the bitter pill the November 26 budget is going to be. Reeves reaffirmed her commitment to the fiscal rules so to have the balances check out, the only options remain spending cuts and/or tax hikes. The latter have long been categorically ruled out in politically sensitive areas such as income taxes which create the bulk of the government receipts. PM Starmer was the first not to do so any longer last week and Reeves followed suit today, refusing to reiterate the party’s manifesto commitment against broad-based tax hikes. She noted instead that the world had changed since Labour came to Power in July last year, citing bigger obligations to adhere to (eg. NATO). Sterling braces for economic impact: EUR/GBP is doing another attempt to take out 0.88, GBP/USD slides to 1.304, the weakest level since mid-April. Safe haven flows push the greenback higher against most other peers as well. EUR/USD (1.1479) snapped below the 1.15 barrier and looks at 1.1392 for support. DXY finally punched through 100 and is less than in inch away from the August high (100.25). A test is all but certain. The only currency besting the USD is JPY. The Japanese yen strengthens from north of USD/JPY 154 to 153.47 currently. EUR/JPY tanks to a two-week low of 176.17.
News & Views
ECB’s Lagarde today in Sofia delivered a speech titled ‘Bulgaria on the euro’s doorstep: towards a shared future’. In this speech, the ECB Chair painted the context as the country will officially adopt the euro on January 2026. Lagarde advocated that joining the euro will offer additional prosperity and security to for the country. Aside from lower conversion costs, adopting the euro will also open the door wider to European capital markets. It will lower funding costs and provide a more stable basis for long-term investment. Regarding financial security, Lagarde acknowledged that the currency board has long insulated Bulgaria by eliminating euro-lev fluctuations. Even so, joining the broader currency area still provides a higher credibility. Lagarde also addressed sceptics in the country as surveys suggest about half of the population might oppose joining the euro. With respect to the fear of losing sovereignty, Lagarde indicates contrary to what is the case in the currency board regime where the country is only ‘importing’ monetary policy, the Governor of the Bulgarian national bank now will have the same vote and responsibility as every other member. Lagarde also acknowledged the concern that the change of currency might lead to higher prices but indicated a series of mechanisms to address this issue. However, she indicated that ‘the greatest risk countries faced was not losing sovereignty or seeing an increase in prices. It was losing reform momentum once inside the euro area and thus missing out on the full benefits of the single currency’.
