‘Risk off’ day in markets
Rising oil prices (Brent spiked to over $113 p/b at one stage), falling equity markets, and a further sell-off in French bonds triggered a flight to the safety of US and German government bonds yesterday. The yen, Swiss franc, and the dollar benefited in the ‘risk-off’ environment that prevailed, with the euro and sterling falling to intra-day lows of about $1.1190 and $1.3355 against the US currency respectively before recovering some ground. However, flash PMI data for October in France, released a short while ago, are weighing on the single currency this morning. It has dipped to under $1.12 again against the dollar, and is trading at about £0.8370 against sterling, more or less matching yesterday’s lows. The pound is also a touch softer against the dollar, trading at around $1.3370.
US and German 10-year yields fell by around 16bps and 10bps respectively, with the former now back below 5%, down from a high of 5.36% just a couple of weeks ago. French bonds underperformed again with the 10-year yield spread over German bonds widening by some 15bps to around 175bps, not far off the 190bps spread reached at the height of the Euro area debt crisis in 2012. Equity markets had a fairly torrid time of it. The Nasdaq led a decline in US stocks, shedding about 2.5%, with the S&P 500 off 1.2%, while European indices fell by 1%-2% on the day.
Retail sales volumes in the UK fell by 0.4% in September, after increasing by an upward revised 0.7% in August, according to data released earlier this morning. For Q3 (July-September), retail spending was up 0.7% on Q2 (the third consecutive quarter-on-quarter increase) and 1.5% higher than in the corresponding quarter in 2025. Separately, consumer confidence declined sharply in October according to the GfK indicator, which recorded its largest month-on-month fall since July 2016 (just after the Brexit referendum vote), with “relentless cost of living pressures” weighing on sentiment this month.
ECB member Panetta says “when long-term interest rates rise in the US, we see spillover effects into other markets, including Europe”, noting that “the problem is that in the US, higher interest rates are accompanied by stronger growth,” but for Europe, higher long-term interest rates are a “drag on growth.” The latter means, of course, that the ECB may not have to raise the deposit rate by as much as might otherwise be the case. Market rate hike expectations were pared back during yesterday’s session (though not on account of Panetta’s comments), with about 66bps of hikes now priced in by September 2027, down from almost 75bps at Wednesday’s close.
For today, October PMI data are due in the Euro area and UK this morning and in the US this afternoon. A final reading for the University of Michigan October consumer confidence index is also due in the US, while the ECB publishes its latest (September) survey of consumers’ short-term (1-year-ahead) and medium-term (3- and 5-year-ahead) inflation expectations.