Markets
- Markets continue to err on the side of new momentum for diplomacy between the US and Iran on breaking the energy-choking deadlock. Brent crude closed below the $100/b mark for the first time since September 8. The European gas reference contract (Dutch TTF) reached a new MtD low below €70/MWh. Rumours suggested that Iran would reopen Hormuz within 7 days after the US ends its economic naval blockade. US President Trump later said he had very good talks with Iranian/Gulf officials in New York. It marked a huge contrast with an earlier speech in which he questioned whether a deal will be made with Iran that lets them rebuild and create a far greater country than ever before or whether he should annihilate the Islamic Republic and do it quickly. Iranian state media in the meantime confirmed the presence of the Iranian president in NY with a potential bilateral meeting on the sidelines of the UN’s General Assembly.
- Consolidation on bond markets continues. The recent thaw in energy prices triggered some correction, especially in Europe, but investors aren’t inclined to fully embrace a de-escalation scenario (yet?). Hawkish ECB & Fed speak puts a floor below front end yields while normalizing term premia keep the long end yields hostage. Daily changes on the US and European yield curves remained limited to +1-2 bps. In Europe, the curve bear flattened vs a bear steepening in the US. German Bundesbank Nagel, hawk by nature, promised that the ECB will be vigilant (vs upside inflation risks) and that it won’t allow second-round effects to materialize. Monetary policy is currently neutral and he won’t exclude a move into mildly restrictive territory. Central bankers on a global level clearly hold the line that supply-side price shocks do ask for some tightening because of the speed at which they are happening, leaving persistent price pressures, and because they missed inflation targets for several years. However, they also indicate that the monetary response should be less aggressive compared to the case of demand-driven inflation. Richmond Fed Barkin left open the question of whether and how many additional hikes will be required. He’s nevertheless bullish on the economic outlook, warns of entrenched inflation expectations and believes that appropriately restrictive policy will play a role. Stock markets mostly closed in the green yesterday, but they failed to stick with Monday’s momentum. The US Nasdaq did manage its first new (all-time) record since June. The dollar holds its pole-position on FX markets. EUR/USD drifts towards 1.1430 and the broader 1.14 support zone with the YtD low at 1.1325 the final target. Today’s eco calendar contains monthly PMI surveys, the start of Chinese President Xi Jinping’s visit in Washington and the OECD’s interim outlook.
News & Views
- US President Trump endorsed the idea of a diesel export ban, telling reporters that he has called for it “within my people”. US Treasury Secretary Bessent later added that the administration is examining the feasibility of a partial or full ban. The US is the world’s largest diesel exporter with some 1.5bn barrels sent across the sea each day. That’s more than a quarter of daily US refiners’ production. The move comes at a time when domestic diesel prices are skyrocketing in the US. The price of a gallon hit a fresh record just yesterday of $6.53. The topic is politically sensitive, particularly in the run-up to the November midterms. Industry experts doubt whether such a ban would have the intended consequences because its core component, oil, is traded and priced globally.
- The French government announced an expansion of targeted energy (price) relief for those most affected yesterday. New or adjusted measures include the extension of an existing €100 payment for low-income drivers for three months until December while the amount of beneficiaries of the scheme would rise from currently 3 million to 5.5 million. Industries such as fishing and farming will also enjoy an extension of fuel support measures. The new measures will cost some €450 million and bring the total so far to €1.4bn. The French government is torn between a cost-of-living crisis that may trigger wider civil unrest ahead of next year’s presidential elections and public finances with zero budgetary room. Rating agency Scope last week cut France’s credit rating to single A because of a worsening fiscal trajectory. France’s 10-yr OAT/swap spread recently topped the psychologically important barrier of 100 bps to rise to the highest since 2012.
