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London Quick Take - 2 Oct - Stocks stage rally as bond rout pauses, US jobs report ahead
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Oil prices had sunk but then pared the losses to rally Thursday, with Brent topping $101 a barrel on reports that Chinese refiners suspended October fuel exports to protect domestic supplies. This comes as Trump reportedly threaten France and Germany with a diesel export bank if they don't tap emergency stockpiles, which comes as he continues to mull a full ban on US diesel exports – a move that traders worry will only drive up global prices for refined products. Oil is flowing out the Middle East, but refined products remain the problem.
French bond yields turned lower on the day briefly after the presentation of the budget, with 10yr OAT yield down ~15bps from its earlier highs at one point (vOlAtiliTy). The French government put forward a budget with €43bn in tax hikes and spending cuts as it seeks to persuade markets it can get on top of a deteriorating fiscal situation. Yields on 10yr OATs hit their highest since 2002 at 4.96% on Thursday morning before pulling back sharply to around 4.8% after the presentation of the budget. This didn’t last and the yield is back to 4.92% as of this morning. The budget itself was widely known, and does not go far enough to reverse the deterioration in France’s public finances, aiming as it does to narrow the deficit to 5% of GDP in 2027, which would otherwise rise to 6.5% without this action. What counts is how this plays out with the other parties, particularly RN, and whether it can pass the vote unmodified, which seems unlikely. It’s Macron’s last stab before the presidential elections next year. Markets want to see this work but Franco-German spreads have blown out to ~140bps, +14bps on the day and almost 60bps extra since the start of September, reflecting not just the unsustainable spending today but anticipation of political risk premia ahead of the French presidential elections. The question is at what point the ECB needs to start looking at using its Transmission Protection Instrument (TPI) to buy up French bonds to smooth spreads.
Nonfarm payrolls on tap expected around 90k vs 162k from the prior month, with the unemployment rate stead at 4.1%. A couple of labour market surveys pointed to strength. Initial jobless claims fell and US employers cut 43,281 jobs in September, down 18% from August and 20% from last year, and making it the lowest total for the month since 2022. September's US ISM Manufacturing survey came in slightly weaker than expected on the headline index at 54.5,but still pointed to solid expansion.
This morning, stocks inched up but European equity markets are set for their worst week since April as the selloff in fixed income continues and macro sets the tone for markets. France's Fiscal Fragility is at the nexus of this week's moves alongside strong US data, which sent sovereign yields to new multi-year highs on Thursday. Bonds have steadied a touch this morning with the US 10yr Treasury yield below the important 5.25% level, but the market hasn't yet found its level and there is the big risk event later with the nonfarms. Oil is back up above $101 but steady and the dollar trades at a 17-month high against a basket of peers.
European equities fell sharply in yesterday's session, with rising bond yields and fiscal concerns in France and the UK weighing on sentiment. The Stoxx Europe 600 lost 1.14% to 627.65, its lowest close since June, while the FTSE 100 fell about 1.7% in its worst session since May to below 10,500, making fresh lows since June and now wrestling with the 200-day moving average. Bank stocks bore the brunt from the blowout in yields, with 30-year gilt yields reaching 6%. This morning the FTSE, DAX and CAC all rose about 0.25% early doors as investors bought into some weaker pockets. Wall St closed modestly higher Thursday and futures are firmer this morning, tracking the cooling in yields.
Tale of the tape: The sharp move for stocks and bonds early yesterday was faded quite a bit by early afternoon trading as it looked as though the bond market found some marginal buyers and regained a bit of posture after yields blew out to fresh cycle highs. That was perhaps a sign that the aggressive pop in yields which drove pretty deep losses for equity markets early on was likely as much technically driven as it was about markets signalling worries about inflation, debt sustainability and competition for capital. That suggests the trend remains higher for yields and that this was not a blow-off top type moment where bond investors finally threw in the towel. Credit markets are still seeking a level and it's starting to reach the point where things break – as I've said before, after 5.25% on the 10yr Treasury is where things get interesting. We've plunged into this territory now and starting to see some dislocations. Bond markets are still in the driving seat and seeking the exit sign. As noted yields have retreated a touch as of this morning – the 10yr Treasury yield is below 5.25% after testing new highs for the cycle at 5.34% intraday on Thursday.
European equities fell sharply in yesterday's session, with rising bond yields and fiscal concerns in France and the UK weighing on sentiment. The Stoxx Europe 600 lost 1.14% to 627.65, its lowest close since June, while the FTSE 100 fell about 1.7% in its worst session since May to below 10,500, making fresh lows since June and now wrestling with the 200-day moving average. Bank stocks bore the brunt from the blowout in yields, with 30-year gilt yields reaching 6%. This morning the FTSE, DAX and CAC all rose about 0.25% early doors as investors bought into some weaker pockets. Wall St closed modestly higher Thursday and futures are firmer this morning, tracking the cooling in yields.
Tale of the tape: The sharp move for stocks and bonds early yesterday was faded quite a bit by early afternoon trading as it looked as though the bond market found some marginal buyers and regained a bit of posture after yields blew out to fresh cycle highs. That was perhaps a sign that the aggressive pop in yields which drove pretty deep losses for equity markets early on was likely as much technically driven as it was about markets signalling worries about inflation, debt sustainability and competition for capital. That suggests the trend remains higher for yields and that this was not a blow-off top type moment where bond investors finally threw in the towel. Credit markets are still seeking a level and it's starting to reach the point where things break – as I've said before, after 5.25% on the 10yr Treasury is where things get interesting. We've plunged into this territory now and starting to see some dislocations. Bond markets are still in the driving seat and seeking the exit sign. As noted yields have retreated a touch as of this morning – the 10yr Treasury yield is below 5.25% after testing new highs for the cycle at 5.34% intraday on Thursday.
Oil prices had sunk but then pared the losses to rally Thursday, with Brent topping $101 a barrel on reports that Chinese refiners suspended October fuel exports to protect domestic supplies. This comes as Trump reportedly threaten France and Germany with a diesel export bank if they don't tap emergency stockpiles, which comes as he continues to mull a full ban on US diesel exports – a move that traders worry will only drive up global prices for refined products. Oil is flowing out the Middle East, but refined products remain the problem.
French bond yields turned lower on the day briefly after the presentation of the budget, with 10yr OAT yield down ~15bps from its earlier highs at one point (vOlAtiliTy). The French government put forward a budget with €43bn in tax hikes and spending cuts as it seeks to persuade markets it can get on top of a deteriorating fiscal situation. Yields on 10yr OATs hit their highest since 2002 at 4.96% on Thursday morning before pulling back sharply to around 4.8% after the presentation of the budget. This didn’t last and the yield is back to 4.92% as of this morning. The budget itself was widely known, and does not go far enough to reverse the deterioration in France’s public finances, aiming as it does to narrow the deficit to 5% of GDP in 2027, which would otherwise rise to 6.5% without this action. What counts is how this plays out with the other parties, particularly RN, and whether it can pass the vote unmodified, which seems unlikely. It’s Macron’s last stab before the presidential elections next year. Markets want to see this work but Franco-German spreads have blown out to ~140bps, +14bps on the day and almost 60bps extra since the start of September, reflecting not just the unsustainable spending today but anticipation of political risk premia ahead of the French presidential elections. The question is at what point the ECB needs to start looking at using its Transmission Protection Instrument (TPI) to buy up French bonds to smooth spreads.
Nonfarm payrolls on tap expected around 90k vs 162k from the prior month, with the unemployment rate stead at 4.1%. A couple of labour market surveys pointed to strength. Initial jobless claims fell and US employers cut 43,281 jobs in September, down 18% from August and 20% from last year, and making it the lowest total for the month since 2022. September's US ISM Manufacturing survey came in slightly weaker than expected on the headline index at 54.5,but still pointed to solid expansion.
Stagflation nation: UK manufacturing cost pressures rose for the first time in four months in September, while output grew at its slowest pace since March, according yesterday's PMI data.
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