Markets
US stock markets ended mixed yesterday with the industrial Dow Jones closing unchanged, the S&P 500 ceding 1.2% and the tech-heavy Nasdaq grinding 2.6% lower. Rotation out of big AI-names thus continues, making Tuesday/Wednesday’s improvement a dead cat bounce. The Nasdaq closed just above first technical support at 26k. A break lower implies downward potential running to the 25k (200d moving average) to 24425 (July low) area. The same narrative goes for European stock markets which fully reversed two-day gains to close 2% (and more) below Wednesday’s closing levels. Core bonds recorded strong safe haven flows with German yields dropping 8 to 9 bps in a slight bull steepening mode. US Treasuries massively outperformed with yields ending 13 bps (30-yr) to 18 bps (5-yr) lower on the day. At the front end of the curve, money markets are lowering their projected central bank policy rate peaks. The AI build-out narrative worked both growth supportive and inflationary (supply exceeding demand). Markets now questioning the strength of the AI-narrative potentially weakens one of the tightening arguments even as inflationary pressures from the energy supply shock keep building. Brent crude this morning approached $115/b. Since the start of the war against Iran, the oil price only recorded a daily close above that level on two occasions. The latest increase started yesterday on reports about specific plans by the US and Israeli militaries for renewed strikes against Iran after the US midterm elections. Iran later threatened with wider retaliation strikes on economic and civilian targets if the US attacks. The European reference for gas prices (Dutch TTF) pierced through the €91/MWh barrier.
The widening of EMU sovereign spread is turning ugly. The French 10-yr OAT swapspread added 13 bps to 161 bps. The Belgian OLO swapspread closed 8 bps higher at 98 bps. Both again underperformed Italian BTPs (swapspread +7 bps). 2027 budget discussions remain ongoing with markets adding pressure for a swift and credible (from a fiscal consolidation perspective) breakthrough. Decisions by rating agencies could apply additional pressure with France facing a possible rating downgrade at Moody’s (Aa3; negative outlook) which would bring its credit rating in line with Fitch and S&P. The latter takes a look at the Belgian AA- rating, which is still one notch above Moody’s and Fitch. On FX markets EUR/USD holds a balance of weakness around 1.12. The likes of JPY and CHF outperform in current adverse market circumstances. Today’s global PMI releases are probably only a sideshow to ruling themes.
News & Views
Japanese inflation quickened from 1.9% to 2.1% in September, topping the BoJ’s 2% target. The gauge excluding fresh food rose to 2.1% as well, from 1.7% the month before. The indicator that ignores both fresh food and energy rallied more than expected, to 2.4% from 1.9% – a clear sign of strong and accelerating underlying price momentum. That’s also apparent in services CPI, which climbed to a six-month high of 1.5%. The Bank of Japan is said to indicate that underlying inflation has reached the 2% target at the October 30 meeting. That would be a first since that goal was set in 2013. But despite clear backing from this morning’s price data as well as from solid October PMIs, the central bank is expected to keep rates unchanged. Several “sources” have already informed the media weeks going into the meeting that the Bank of Japan is leaning against what would be a back-to-back hike later this month. Money markets give it a near zero-probability and instead eye December for a next move to 1.5%. The Japanese yen after some risk-driven swings in early Asian trading is currently hovering near yesterday’s close around USD/JPY 157.
UK GfK consumer confidence in October tumbled to -24 from -13, the second-lowest in three years and the largest one-month drop since the Brexit referendum of 2016 – excluding the pandemic. The “Burnham boost” over the summer is fully wiped out with cost-of-living concerns fully taking over again. The headline drop was broad-based across all sub-indicators and income, age and gender demographic groups. Surging energy prices are increasingly filtering through the UK economy with diesel prices recently having set a record high and a 25% increase in energy bills looming next January. In addition, key mortgage rates are edging closer to 6% after the long-term 30-yr UK yield (be it temporarily) surpassed that bar already earlier this month.
