Sunset Market Commentary

Markets

UK markets trade very volatile today. It started with overnight rumours about UK Chancellor Reeves dropping her controversial tax-raising measures for the 2026 Budget to be released November 26. The last-minute turnaround seemed to be inspired by the coup attempts against the other Labour frontman, PM Starmer. Apart from the credibility perspective, the U-turn also placed doubt over the government’s ability to plug the budget hole and re-install existing (narrow) fiscal buffers. As a result, UK gilts and sterling sold off at the start of trading with UK yields sprinting more than 10 bps higher across the curve and EUR/GBP setting a new cycle top above 0.8860. Part of the losses were undone slightly after incurring them on reports of improved forecasts by the Office for Budget Responsibility. They expected productivity downgrade would be partially offset by other factors like strength in government receipts and stronger wage performance. As a result, the predicted fiscal hole (without building) buffer would be closer to £20bn than to £35bn. The UK asset-comeback move rapidly ran out of steam over worries that the budget watchdog’s forecasts would paint an overly optimistic picture for the UK economy. Anyway, today’s episode highlights the fragility of UK public finances, the lack of fiscal leeway by the government and market sensitivity to the theme. We expect UK risk premia to stay elevated in the run-up to the November 26 deadline. The UK yield curve bear steepens today with yields 6.2 bps (2-yr) to 12.2 bps (30-yr) higher across the curve.

The sharper risk correction grabs remaining headlines today. Main European indices lose 1.5% to 2% after reaching all-time highs earlier this week. US stock markets open 1%-1.5% lower. US Treasuries again outperform German Bunds on bond markets with daily changes on the US curve varying between -2.9 bps and -4.1 bps with the belly of the curve performing best. The eco calendar remains empty, but the US government is rumoured to return to publication starting next Tuesday or Wednesday. The September payrolls report and September producer prices are in pole-position as data were already gathered before the start of the US government shutdown. Headlines that net new borrowing by the German government will be €8bn higher than originally planned next year (€98bn or above €180bn including special funds for defense and infrastructure outside the core budget) help explain the Bund’s underperformance. Changes on the German curve are close to zero compared with yesterday. The dollar again showed two faces, initially profiting from the risk correction, but handing back gains on the diverging path of German Bunds and US Treasuries. EUR/USD currently changes hands around 1.1635 almost perfectly in line with starting levels.

News & Views

The European Commission is finalizing plans for an overhaul of the European Securities & Markets Authority into a model that is more like the US’ SEC. It entails a major transfer of national powers to the European regulator, including oversight of “significant” clearing houses, depositories and trading venues as well as all crypto firms and the creation of a Pan-European Market Operator so firms can use a single authorization to operate across the EU. The hope is that aligning Europe’s fragmented capital markets piece by piece ultimately leads to higher growth as private savings find their way outside national borders. The Commission’s proposal needs agreement in the European Parliament and the council of EU member states. While the likes of France have been a staunch proponent, other member states are more reluctant to cede national powers.

The US Trade Representative Greer said the US and Switzerland have “essentially” reached a trade agreement. The deal would lower tariffs from 39% currently to 15%, matching the EU’s rate. Greer added that Switzerland has additionally committed to investing $200bn in the US and that it promised to buy more Boeing planes. A Swiss delegation arrived yesterday in Washington DC and rumours of a potential trade deal were already circulating earlier this week. Combined with Swiss National Bank comments that dampened speculation of a return to negative rates and safe haven flows (especially today) have been a boon to CHF in recent days. The Swiss franc rose from EUR/CHF 0.931 end last week to 0.919 currently, the strongest Swiss franc level on record barring the volatile swings early 2015 in the wake of lifting the CHF cap.