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European markets slip back on rising yields, and growth concerns

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It’s been a lacklustre start to the week, as the optimism of last week has given way to concerns that rising energy prices could well translate into weaker growth, as well as the risk of some possible policy tightening by central banks to help anchor future inflation expectations.

Europe

This morning’s weaker than expected China Q3 GDP number hasn’t helped, although why anyone is surprised by today’s number is anyone’s guess, given the well documented problems that have been reported from the world’s second biggest economy these past few weeks.  

We’ve also seen a sharp increase in yields, driven by sharp rise in New Zealand inflation, as well as comments from Bank of England governor Andrew Bailey, at the weekend, that the central bank could well look to react to rising inflationary pressures in the coming months.

UK markets are already starting to price up to two rate increases by the end of this year, starting next month.

While an increase in money market rates is probably justified as a precautionary measure there is a sense that markets are getting a little ahead of themselves when it comes to UK rate expectations, with the UK 2-year yield at a 30-month high of 0.75%. The case can certainly be made for one rate rise by year end, probably in December, of 0.15%, however it’s a little harder to make the case for two, especially since the bank is still doing QE.

Today’s declines in the FTSE100 have been across the board, with consumer discretionary feeling the impact of today’s weakness. Companies like IAG and easyJet are under pressure along with the likes of Whitbread and IHG, with retailers and UK housebuilders also seeing weakness.

On the plus side we’ve seen some outperformance from utilities after National Grid said it expected that earnings for the current fiscal year would be weighted towards the first half, and that profits for the year are expected to be in line with expectations.     

US

US markets also last week in solid fashion, with the Dow posting its best week since June, and within 1% of its record high, with the S&P500 and Nasdaq also finishing the week strongly. Today we’ve slipped back a touch, as we gear up for a fresh slew of company reports, and an absolutely horrendous set of industrial production numbers for September, which showed a 1.3% decline while August was also revised lower.

US yields are edging upwards again with the US 10 year briefly ticking back above 1.6% again, however it’s the moves in short term rates that are gaining the most attention with the US 2-year yield back above 0.4% for the first time since March last year.

Disney shares are the worst performers on the Dow after being downgraded by Barclays, while the likes of Boeing and Caterpillar are underperforming over concerns that disruptions to supply chains will markedly slow global growth.

Goldman Sachs is the best performer as it builds on its gains from last week in the wake of its bumper earnings report.

FX

For all the talk that the Bank of England might be looking to raise rates next month, currency markets don’t appear to be buying it, and it’s not hard to see why. There is certainly a case for a modest rise in rates, however bond markets appear to be overinterpreting what the governor said at the weekend. For a start the bank is still buying assets which suggest that markets are putting the cart before the horse. Furthermore, Bailey would need to garner a majority consensus for a move on rates, and while he may be able to make a case for a 0.15% rise in bank rate by year end, anything more than that is likely to be a trickier proposition.

The New Zealand dollar is amongst the best performers after headline CPI came in ahead of expectations at 2.2%, and having already raised rates once this month, there appears to be a sense that, even with the prospect of growth slowing, central banks might have to take some pre-emptive measures to temper some of the upward pressure on prices.   

Commodities

Crude oil prices are still showing little sign of slowing down, with Brent crude prices on course to retest the 2018 peaks, on concerns that some OPEC+ members are struggling to lift their output by the required amount due to problems created by a lack of maintenance, when output was cut back drastically after demand plummeted last year.

US crude prices are also continuing to track higher, pushing up to 7-year highs, as demand shifts away from natural gas due to the high prices being seen in that market. This may also help explain why US natural gas prices are starting to look a little soft hitting a three-week low earlier today.

Bitcoin prices have managed to recover above the $60k level today in anticipation of tomorrow’s debut on the NYSE of a new futures ETF.


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