It’s been a disappointing start to the new quarter and the week for European markets with broad weakness across the board with the agreement of a deal to avert a US government shutdown serving to push US yields higher, along with the US dollar.
The calculus here appears to be that this deal, while averting a crisis of confidence in US governance, shifts attention back to the resilience of the US economy, and the prospect of further rate hikes from the Federal Reserve.
UK yields are also pushing higher for similar reasons, after last week’s upward revisions to GDP, with bond investors seemingly concerned that the Bank of England may have to hike rates again between now and the end of the year. This still seems unlikely given the challenges facing the UK economy over the next few months even if you factor in the recent rise in oil prices and the weaker pound.
Today’s weakness has seen the FTSE100 fall below last week’s low, and to its lowest levels since the 13th September, with broad weakness across the board.
There have been some bright spots but they’ve been few and far between, with outperformance from the UK defence sector with BAE Systems edging higher after winning a £4bn contract for nuclear submarines from the UK government for the next phase of the AUKUS submarine project. Babcock also announced it has signed a smaller 5-year deal in respect of the same project.
We’ re also seeing the utilities sector outperforming the wider index with United Utilities following the announcement from Severn Trent last week by saying it intends to £13.7bn between 2025 and 2030 in improving the water infrastructure of the North West of England. The company said it expects to raise notional equity of £1.35bn and that current financial performance is in line with expectations.
US markets slipped back on the open as the news that a government shutdown has been avoided collides with the reality that a resilient US economy will probably mean US rates could well need to go higher.
Today’s economic data appears to support the idea of US resilience with the latest manufacturing data for September coming in slightly ahead of forecasts. The latest ISM manufacturing survey showed a recovery in activity to 49, with prices paid slowing to 43.8, while employment rose to 51.2. These latest numbers would appear to suggest that the slump in US manufacturing has bottomed and could start to improve further in the coming months.
Rivianshares have slipped back despite reporting Q3 vehicle deliveries that were better than expected at 15,564, however the decision to leave full year guidance unchanged at 52k has prompted some weakness on disappointment that we didn’t see guidance pushed higher.
Tesla shares are also lower after Q3 deliveries came at 435,059 below expectations of 456,722. Production also came in below forecasts with all models falling short of forecasts. This was a sharp slowdown on the record 466,140 cars that were delivered during Q2, although production downtime at the Shanghai and Austin gigafactories accounting for most of the shortfall.
The US dollar has got off to a strong start to the week rising strongly across the board with the biggest gains coming against the commodity currencies in the wake of weaker than expected China Caixin manufacturing and services PMIs for September, which also served to knock copper prices down sharply.
Amongst the worst performers has been the Australian dollar with the weakness in metals prices weighing on the currency ahead of tomorrow’s interest rate decision, where rates are expected to be held at 4.1%.
The Japanese yen has continued to look weak against the US dollar as it continues to get drawn towards the 150.00 level like iron filings to a magnet, despite more verbal intervention this morning this time from Hirokazu Matsuno who is a Japanese politician.
The euro has also continued to come under pressure after another set of disappointing manufacturing PMI numbers which showed little signs of an improvement in September, with the single currency slipping towards last week’s lows below 1.0500.
Crude oil prices look set to fall for the third day in succession after an announcement from Turkey that a key pipeline between Iraq and Turkey was ready to reopen. Iraqi officials appear to be pushing back on that idea which is helping to limit the downside, with the strength of the US dollar appearing to help limit the upside in the short term.
While oil prices continue to look well supported, the continued weakness in Chinese data has seen copper prices fall sharply as they fall back towards their lows of last week. With China off for Golden Week
The rise in yields and the strength of the US dollar continues to crush gold prices, sliding to their lowest levels since the 10th March with the prospect that we could see prices fall further, towards the March lows around $1,810.
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