Market movers today
The week kicks off in a quiet fashion in terms of data, so focus will remain on geopolitics and the next developments in the war between Israel and Hamas.
Tomorrow we will get October flash PMIs from the euro area, UK and the US, which are widely expected to show that economic activity continues to slow down. Another release of interest tomorrow will be the ECB bank lending survey ahead of Thursday’s ECB meeting.
This week’s main event will the ECB meeting on Thursday where we and the markets widely expect the Governing Council to keep rates on hold. Also see our ECB Preview – Keeping a tightening bias with optionality, 17 October.
Central Bank of Turkey will also meet on Thursday, and there consensus expects another 500bp hike which would bring the policy rate to 35%.
On Thursday, we get Q3 GDP data from the US and the week is rounded off with the University of Michigan survey on Friday.
The 60 second overview
1. Markets: Risk-off sentiment has been weighing on equity markets in the US and Europe. The S&P 500 Index saw its largest weekly decline in a month, influenced by geopolitical tensions, stern remarks from Federal Reserve officials, and a surge in long-term bond yields, reaching 16-year highs. This period also witnessed growth stocks underperforming compared to their value counterparts. The 10-year U.S. Treasury yield approached 5%, its highest level since 2007.
Germany’s 10-year government bond yield neared 2.9%. Italian bond yields also rose, pushing the yield differential between German and Italian 10-year debt above 200 basis points. Oil and gold both fell on softening fears of escalation in the Middle East. USD/JPY briefly breached the 150 mark – a possible intervention level by Japanese authorities. EUR/CHF hit new all-time lows, just above the 0.94 mark.
This morning, Asian markets are mostly down. Equity futures point to a flat opening in Europe and slightly positive in the US.
2. Middle East conflict: Hamas released two US hostages and aid started entering Gaza through Egypt’s border. However, Israel has increased air attacks on Gaza in anticipation of the next stage of the conflict with Hamas. Israel also cautioned that Hezbollah could potentially involve Lebanon in a broader regional warfare.
3. Japan: Although Japan’s inflation rate slowed in September, with the core consumer price index increasing by 2.8% y/y (down from 3.1% in August), it remains above the Bank of Japan‘s 2% target for the 18th consecutive month. The BoJ is expected to raise its inflation forecasts at the 31 October meeting, where further tweaks to the Yield Curve Control could be on the cards.
The primary focus now lies on wage growth, as higher pay demands for the next year could signify evolving wage-setting behaviour and growing confidence in the BoJ’s progress toward its target. The Japanese Trade Union Confederation (Rengo) plans to demand at least a 5% wage increase during the 2024 “shunto” spring wage negotiations, and the BoJ sees sustained wage growth as a critical factor in achieving its inflation target.
4. Equities: Risk-off sentiment continued across regions and sectors on Friday. Global equities were down a little more than 2% last week with cyclical growth underperforming. Friday was characterised by rather classic defensive rotation in equities but also more classic risk-off across asset classes and high-grade bond yields moving lower. In the US, Dow -0.9%, S&P 500 -1.3%, Nasdaq -1.5% and Russell 2000 -1.3%. The negative sentiment from Europe and US on Friday has carried over to Asia this morning with indices lower across the region.
European futures are flat this morning while US futures are marginally higher.
5. FI: 10Y US Treasuries are again testing 5% as yields are rising in Asian trading hours even though there was a modest decline on Friday.
Furthermore, the 2-10Y US curve continues to bear-steepen and is now at just -15bp relative to -80bp in September. We have seen the same movement in the 2-10Y German yield curve.
6. FX: EUR/USD ended last week higher, just below the 1.06 mark. USD/JPY is still hovering slightly below 150. EUR/GBP reached its highest level since May during Friday’s session and is now trading above 0.87. EUR/CHF hit new all-time lows, just above the 0.94 mark. Poor risk sentiment caused EUR/SEK to fluctuate around the 11.60 mark, while EUR/NOK broke 11.70 for the first time since July.
7. Credit: The credit markets ended last week on a relatively worried note. During Friday, iTraxx Main continued to widen (+2.5bp) to 89.5bp while iTraxx Crossover widened (+10.6) bp to 472.5bp. The negative development in the CDS market for the week (+3.8 and +18.8 bp) was also visible in the cash bond market, where secondary bond trading experienced a lower-than-normal activity level. Primary markets remained inactive most of the week as the ongoing Q3 earning season progresses.
