Risk Sentiment Took an Impressive Turn for the Worse

Markets

Risk sentiment took an impressive turn for the worse during US trading. The combination of good Nvidia results published Wednesday after trading and decent US September payrolls release (119k job growth vs 53k expected) initially looked like giving investors some comfort after the recent risk-off repositioning. However, initial (equity) gains could not be maintained and soon morphed into a protracted profit-taking/sell-on-upticks pattern. After opening gains of up to 2% (Nasdaq), US indices closed between 0.84% (Dow) and 2.15% (Nasdaq) lower. For the S&P and the Nasdaq, key support (October lows) is again under heavy strain. US yields also faced conflicting drivers. The payrolls as such didn’t given any clear message on whether or not the Fed should already engage to an additional rate cut early December. However, with only about 25% of a cut priced in, there also was no reason to push (short-term) yields higher. What can’t go up, must come down. As such, a correction in asset prices isn’t a reason for the Fed to instantaneously react with additional easing. Even so, bond yields gradually declined further throughout the session and lost between 6.3 bps (5-y) and 3.3 bps (30-y). Still markets now only discount a probability of about 40 % of a December cut. Yesterday’s developments, including financial stability considerations, didn’t make things easier for the Fed. The US risk-off occurred for an important part after the European close. German yields changed less than 2 bps across the curve with the very long end slightly underperforming. (30-y +1.7 bps). FX again remained an area of relative calm in the overall turbulence. DXY at 100.15 closed little changed and stayed below the 100.25/36 resistance area. EUR/USD closed marginally lower at 1.153. USD/JPY (157.5) closed slightly higher (on yen weakness), but off the intraday highs. The risk-off also aborted the intraday rebound of sterling (EUR/GBP close at 0.882).

Asian equity markets this morning join the US risk-off move with losses of 3%+ (Taiwan, South Korea). The Japanese government unveiling its stimulus plan didn’t put any additional pressure on local bonds or the yen (see below). On FX markets, the dollar slightly underperforms (DXY 100.1, EUR/USD 1.154). UK October retail sales published this morning, were weak (-1.1% M/M). UK public sector net borrowing was sightly higher than expected. EUR/GBP rises a bit after the data (0.882). Later today, the calendar contains the EMU (and US) November PMI’s. Consensus expects EMU PMI’s to hold near last month’s levels (composite 52.5), which indicate the EMU economy is holding up relatively well. This cemented the ECB’s wait-and-see modus. Interesting to see whether last month’s relatively good news can be confirmed. After their recent rise, EMU yields probably are a bit more sensitive to a negative than to a positive surprise. US PMI’s usually are less important than the ISM’s, but especially a negative surprise (composite expected at 54.5) might cause markets to raise the expectations on a Fed rate cut. The main focus of global investors remains the equity correction. At least for now, the risk-off is no easy guarantee for real USD outperformance. In EUR/USD, the first important reference (1.1469, Nov 05 low) is still somewhat away.

News & Views

Japanese business activity picked up further in November. The composite PMI rose to 52, the joint-highest since August 2024 and carried by the services sector (53.1). While manufacturing kept struggling (48.8), output fell at the slowest pace since August and new orders fell only fractionally. Business confidence regarding future output rose to its highest since January. Anticipating capacity expansion, it helped employment increase at the strongest pace since June. This may have been related to rumours back then – facts by now – of largescale stimulus that the Japanese government was preparing. PM Takaichi’s cabinet this morning approved the biggest additional spending increase since at least 2005, barring the pandemic years (2020-22). Extra spending of JPY 17.7tn is aimed at price relief. Inflation indeed remains a hot topic, PMIs showed. Average input costs rose at the quickest rate in six months on labour costs and supplier price hikes. This led to a solid increase in selling prices. The cabinet said its spending package would push down inflation by 0.7 ppts from February to April. Prices have been rising faster than the central bank’s 2% since April 2022. October data this morning showed little signs of relief. Inflation sped up to 3% from 2.9% (headline and core ex. fresh food) and to 3.1% from 3% (core ex. fresh food and energy). The combined set of economic data and news today keeps the Bank of Japan on track to hike the policy rate by year’s end to 0.75%. Money markets remain unconvinced (+/- 15% probability). Both Japanese bonds and the yen strengthen today in a budget-related buy the rumour, sell the fact move. USD/JPY eases to 157.2, long-term bond yields drop more 6-7 bps after having hit record highs earlier this week.