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Bond market volatility keeps stock markets on edge

European markets underwent a mixed finish to start off the new week, although they did manage to finish off the lows of the day after US 10-year yields slipped back sharply despite earlier posting new multi-year highs.  

The FTSE100 underperformed, finishing lower largely due to weakness in basic resources and the slide in the oil price.  

US markets finished the day similarly mixed, also rebounding strongly off the lows of the day, moving inversely to the sharp slide in yields, after Pershing Square’s Bill Ackman tweeted that he had covered his bond shorts and that the US economy was weaker than it looked.

This appears to have prompted a sharp rally in bond prices, and a bout of short covering, with the 10-year yield trading in a 19bps range, which in turn has seen the US dollar slide, along with crude oil prices. 

The main beneficiaries of the slide in the US dollar, were the euro, which pushed up to a one-month high, as well as the pound, both of which rebounded strongly, with euro shorts probably being covered ahead of Thursday’s ECB meeting, and today’s flash PMIs.

The slide in the US dollar, along with the rebound off the lows in US equities could in part have been because of reports that Hamas is prepared to release more hostages, with another 2 reported released, along with further reports that another 50 with dual citizenship might be released, although at the time of writing this hasn't been confirmed.

This optimism isnt being reflected in equity markets currently with markets in Europe set to see a lower open.

Away from the Middle East where the situation continues to remain tense, with today’s docket including the latest flash PMIs for October, as well as UK unemployment data, delayed from last week.

Starting with UK unemployment for the 3-month period to August the ONS has said that today’s release is going to be an experimental set of numbers, and that they wouldn’t be publishing the unadjusted Labour Force Survey.

The reason for the delay, according to the ONS is that the survey data wasn’t tallying with tax data as well as employer surveys.

Given this it could well be difficult to draw too many conclusions from today’s data release if it diverges too much from the previous set of numbers, with expectations that it could remain unchanged at 4.3%. with employment expected to fall by 198k for the 3-month period to August, following on from a -207k fall for the 3-months to July.

At the last set of numbers, the number of vacancies fell below 1m for the first time since the summer of 2021, in a continuation of a trend which if it continues could well signal that the Bank of England is done when it comes to further rate hikes.  

A further slowing in flash PMIs could well reinforce this message, with the ECB set to pay close attention to today’s French and German numbers ahead of their meeting on Thursday.

It’s already reasonable to suggest that the ECB won’t move on rate this week, with the October flash PMIs merely serving to underscore how weak the European economy remains, and with the recent sharp rise in energy prices this weakness is likely to endure.

The September PMIs for France, Germany and the UK saw further economic weakness in the services sector.

France slipped to 44.4 from 46 despite hosting the Rugby World Cup, although we could see a pickup to 45 today. Germany did see a modest pickup from 47.3 to 50.3, although this is expected to soften to 50 today.

The UK also slowed to 49.3 from 49.5, while manufacturing for all 3 remained in the doldrums, at 44.2, for France, 39.6 for Germany and 44.3 for the UK.

The US flash PMI numbers are expected to be slightly more resilient but not overly so with manufacturing at 49.5 and services at 49.9.

EUR/USD – broken through the 1.0640 area opening the prospect of a move towards 1.0740. The main support remains at the October lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move. 

GBP/USD – broken above the 1.2200 area, opening the prospect of a move towards 1.2300 and a test of the 200-day SMA at 1.2400. Support at 1.2100.    

EUR/GBP – spiked up to the 0.8740 area last week and has since slipped back with support now at the 200-day SMA at 0.8680. A move below the 0.8680 area could signal a false break and a possible return to the trend line support from the August lows now at 0.8650.

USD/JPY – currently struggling to break through the previous highs at 150.16. A break of 150.30 targeting a move towards 152.20. Support at the lows last week at 148.75.


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