Whether because of dovish Fed speak or modest haven demand for bonds, or most likely a bit of both, we’ve seen a sharp repricing when it comes to bond yields in the last couple of days.
Europe
The big increase in yields seen in the aftermath of Friday’s payrolls report has disappeared, while stock markets have rebounded in the hope that the fallout from this weekend’s horrific events in Israel will be contained, at least for now.
Consequently, yesterday’s weakness in European markets has been fully reversed with the DAX and FTSE100 both rising to a one week high, despite the IMF lifting its inflation forecast for next year to 5.8%, and downgrading its growth forecast for the global economy to 2.9% from 3%.
The IMF also upgraded its forecasts for this year as well as next year for all the major economies with big downgrades for 2024 for the UK and Germany of -0.4%, while upgrading the US by 0.5%. That said we shouldn’t read too much into these given that the data used by the IMF hasn’t considered the recent changes to UK GDP methodology which were announced by the ONS last month, and as such are probably about as much use as yesterday’s fish and chip paper.
Reports that China is about to embark on a $137bn stimulus package is also adding to the positive mood, however this has an added danger that it could ignite further commodity price inflation, and thus entrench underlying inflation even further. That said the amount being touted is tiny and isn’t likely to move the needle that much however it is an acknowledgment that it might be the start of further piecemeal measures.
Today’s rebound has been broad based with strong gains for miners led by Anglo American, Antofagasta and Rio Tinto, while Asia focussed businesses of Prudential and Standard Chartered Bank are also higher.
UK retail sales and spending data for September showed that consumer spending patterns had changed during the month, with the warmer weather prompting increased sales of drinks and other barbecue related goods, while clothing sales slowed, although this type of spending will probably pick up when the weather gets colder, and wetter so has merely been deferred. Grocery price inflation also slowed to its lowest level since July last year, although it remains high at 11.1%.
Credit card spending was resilient reflecting the trends seen in the Kantar and BRC surveys today, with spending on essential items rising, while discretionary items also held up well, with the warmer weather helping to boost the high street and pubs and travel also continuing to look resilient. This has helped to offer a modest lift to the retail sector with solid gains for JD Sports, Next, and Marks & Spencer, while Premier Inn owner Whitbread has also had a good day.
US
US markets have picked up where they left off yesterday, opening higher as markets settle down into a more measured overview of recent events, and mull the modest change in tone from Fed policymakers when it comes to the next move on interest rates.
ARM Holdings shares are in focus after being on the receiving end of new broker coverage from several Wall Street banks and brokerages with price targets set varyingly between $60 and $70 a share.
PepsiCo shares are higher/lower after seeing Q3 revenues come in at $23.45bn and profits of $2.25c a share. The company went on to say that it expects to see full year revenue and profits to come in at the top end of expectations, despite lower volumes.
Defence contractors have remained in focus after yesterday’s gains with Palantir shares looking to book 5 successive daily gains after the company announced a new $250m contract with the US army to support AI capabilities.
FX
We’ve seen a modest rebound in both the euro and the pound today after the weakness of yesterday, with the US dollar giving up the ground it made yesterday on the back of the decline in yields and more the positive market mood.
Commodities
After two days of strong gains, gold prices have stabilised at one-week highs as the retreat in yields and the uncertainty caused by events in Israel has restored some of the yellow metals haven status.
UK and European natural gas prices are up strongly for the second day in succession, rising to their highest levels since June, due to reports of a gas leak in an undersea pipeline in the Baltic Sea between Estonia and Finland might have been sabotage.
Crude oil prices on the other hand have slipped back as the froth comes off the strong gains that we saw yesterday.
Volatility
Oil remains the standout in terms of price action following the notable gains seen at the start of the week. Markets are attempting to understand how the situation in Israel will now unfold and critically whether other states will explicitly weigh in. Brent crude prices recovered around half of last week’s losses, driving one day vol on the contract to 41.61% against 27.08% for the month. West Texas Intermediate was similarly elevated, coming in at 43.69% on the day and 29.88% on the month.
No surprise off the back of rallying underlying prices that CMC’s proprietary basket of oil and gas producing stocks also fared well during the day. The cohort struggled last week as crude collapsed, but most of the downside has now been recovered. One day vol stood at 37.15% against 32.43% for the month.
Spain’s IBEX was the worst performing major European equity index on the day, with heavyweight constituents including a few banks and British Airways owner IAG all having a less than optimal session. The underlying closed almost 1% lower, with one day vol printing 20.81% against 19.84% for the month.
Activity across fiat currencies was recorded as being somewhat subdued but there were some pockets of action seen in the crypto space, most notably amongst altcoins. Avalanche was the outlier here with reports of a security breach on the network leading to downside pressures. One day vol on AVAX/USD sat at 61% against 48.05% for the month.
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