A Flurry of Positive Trade News Keeps the Party Going

Markets

Friday’s US combination of slightly softer than expected September inflation with strong headline October PMIs & weaker output price pressures offered fertile breeding ground for stock markets. Business confidence for the year ahead deteriorated on lingering tariff concerns but that nuance was lost on Wall Street. Bourses gapped higher towards new record highs. US yields wiped out most if not all of the CPI driven losses, resulting in net daily changes varying between -0.9 bps (2-yr) to +1.4 bps (30-yr). An improving services sector (Germany) pushed euro area PMIs to a 17-month high, topping expectations and causing European bond underperformance vs Treasuries. Bund yields rose 3.8-5 bps across the curve. The implied money market probability for another ECB rate cut dropped again after creeping higher (and weighing on front end yields) in the past few weeks. EUR/USD was nicely balanced with the pair closing near its opening levels around 1.163. EUR/GBP’s closing level (0.874) was the highest since end-September. UK PMIs beat consensus as well but were sub-par compared to the European (and US) version. They imply a mere 0.1% growth for the ongoing quarter.

A flurry of positive trade news keeps the party going during the Asian session this morning. Equities bathe in a sea of green. The Nikkei 225 (2.5%) topped the 50k mark for the first time. SK and Chinese exchanges rise up to 2.5% and 1.2% respectively. US and Chinese trade negotiators during a two-day marathon in Malaysia (ASEAN summit) wrapped up yesterday said they came to terms on several critical issues related to fentanyl, soybean purchases and China’s recently announced tighter export controls on rare earths. USTS Bessent said Trump’s 100% tariff threat is now off the table. The stars seem aligned for Trump and Xi to now finalize an extension of the trade truce during their first in-person meeting since 2019 on October 30. The likes of copper, iron, steel and oil are all rising. Brazilian president Lula meanwhile said he had a “surprisingly good” meeting with Trump on the sidelines of the ASEAN summit. He expects a ”definitive resolution” in the coming days. The US slapped Brazil with 50% tariffs on some key goods. Canada is the odd one out here. Trump said he’s increasing tariffs on Canadian goods by 10% in response to an advertisement aired by the Ontario government in which former president Reagan lashed out at tariffs and defended free trade. We don’t expect that to spoil the current risk-on mood though. Core bond yields grind higher, with Treasuries particularly eying supply today ($69bn 2-year and $70bn 5-yr). The euro and dollar tread water going into central bank meetings by both the Fed (Wednesday) and the ECB (Thursday). The Bank of Japan follows on Thursday. Euro area inflation and Q3 GDP numbers are also on tap.

News & Views

Rating agency Moody’s changed the outlook on France’s Aa3 rating from stable to negative. The decision reflects the increased risk that political instability hampers the government’s ability to address key policy challenges such as an elevated fiscal deficit, rising debt burden and durable increase in borrowing costs. Political fragmentation also risks the long-lasting reversal of previously adopted structural reforms, in particular the 2023 pension reform. A downgrade of France’s ratings would likely result from further evidence that the ability of the legislative institutions to effectively tackle the country’s key credit challenges has durably weakened. A lasting pause or reversal of reforms would also add to downward pressure on the rating. Rating agencies S&P and Fitch already moved the French rating into single A category (A+) because of similar concerns. Also on Friday, S&P confirmed both the Belgian (AA) and the Slovakian (A+) credit rating while sticking with negative outlooks on both of them.

The People’s Bank of China implemented a new strategy on the country’s currency in the wake of the Communist Party Central Committee’s plenum. In the previous five-year plan (2020) it called for advancing the yuan’s role in a prudent and steady manner. The central bank now embraces the internationalization of the currency, aiming to expand the currency’s use in trade, deepen the two-way opening of financial markets in an orderly manner and further developing the offshore yuan market. The strategic move suggests that China hopes to boost its currency to a leading role, reducing the global reliance on the dollar. The PBOC set the yuan’s fixing at the strongest since October 2024 this morning with USD/CNY currently trading at 7.11.