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London Quick Take - 10 Sep - Macro drivers in charge as Brent hits new high, yields back up even more after Treasury buyback underwhelms
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
TL/DR: Stocks attempt to stabilise after yesterday's selloff but macro drivers are very much in charge for risk with oil breaking $102, 10yr Treasury yields holding onto a rally to a fresh 3-yr highs and ECB set to hike + US CPI tomorrow.
European stock markets opened mixed Thursday ahead of an expected rate hike by the European Central Bank after a resurgence in oil prices on Wednesday sent stocks down and bond lower. The FTSE 100 trades flat, steadying after a 4-day decline that's taken it to a 7-week low, while the CAC is showing a bit of strength to rise +0.25% in early trade.
Bond yields extended their push higher after the US Treasury announced a tripling of buybacks, which fell short of market expectations. The US 10-year yield held near Wednesday’s new cycle high of 4.85% after the plan to buy up to $6 billion of longer-dated debt disappointed some on Wall Street who had expected a bigger increase. Later on, a 10yr Treasury auction of 39bn bonds drew solid demand got off with a yield of 4.834%, shy of the highs. The 10yr kicked on further this morning to 4.86% as oil broke higher. With oil and yields up stocks ended lower with the S&P 500 –0.5% lower and Dow Jones –0.77%, while the Nasdaq fell –0.64%. Futures are mixed with the Nasdaq seen lower and DJIA and SPX trading a little firmer.
Treasury Sec Scott Bessent brought a pea shooter to a bazooka fight ... the $6bn fell short of market expectations for something much bigger, and perhaps signalled Treasury knows it cannot step in front of the fundamentals. Upping buybacks to $6bn from $2bn is a lot larger but it's in line with Bessent saying they could "at least" double buybacks – it lacked both the shock of a bigger operation and the awe of a clear commitment to do more. While the Bessent Put could get bigger if he wants to, risks to bond yields remain to the upside unless something material changes in terms of the fundamentals. For me that'll be a more assertive Fed, but I have doubts that it's prepared to be tough and not do Treasury's bidding... there's pain to come either for stocks or bonds - CPI inflation data has the steer tomorrow in terms of whether the Fed can step up to the plate next week. US PPI data is due up later, fc +0.3% month-on-month for core and +0.4% on the headline. There is also a 30yr Treasury auction this evening. This is one of the most complex macro setups I can recall.
The takeaway was essentially that Treasury is in theory providing support to liquidity and term premia, but not yet on a scale large enough to fundamentally change concerns about heavy government borrowing, large fiscal deficits and long-term Treasury supply + plus all the other factors that's driven bond yields higher like AI capex and structural shifts in who's buying government debt. It's hard to see what the plan is here - keep increasing and inviting the market to take on the house? How big is big enough? Treasury may be in a bind; do less and disappoint the market, do more and look like it's reason to be really worried (remember Bessent has all this asymmetric information, so if he is really increasing the buybacks say x8, x10 or whatever then it would look to Mr Market like there is a reason to sell bonds... Some further thoughts here on what the Fed should do.
Brent crude prices nudged $102 in early European trade after moving up on continued escalation in the Strait of Hormuz. Iran said it had hit 10 ships near the Strait after the US sunk 5 Iranian tankers in what's the biggest wave of attacks on shipping since the war began. There are no signs yet that a durable ceasefire is coming, let alone a return to the status quo ante. Brent neared $102 where it's facing the big horizontal resistance from the 23 July peak. Support is forming around the $101.30 level, the 22 May low that held before it gapped lower over the weekend of 23/24 May back to $95/96. An upside breach of $102 calls for return to 61.8% retracement Apr-Jul pullback at $105.
Don't worry the President has a timetable; Trump said yesterday that the war with Iran would end "immediately after the election." As night follows day, oil prices will “right after” the midterm elections, he asserted. Does he have a crystal ball? It seems oddly precise…maybe it’s asymmetric information of the kind his Treasury Secretary, Scott Bessent, aka The House, claims to have? The WSJ reports that Trump advisors think the war will go on until the end of his term as president...this is certainly plausible.
Anyone for stimmy checks? Remember when the US government poured petrol on the inflation fire with reckless handouts? Trump wants to do it again, only bigger, giving every American adult $5,000 if the Republicans sweep the boards at the midterm elections. Leaving aside the chances of the Republicans retain control of Congress, this would clearly be an inflationary impulse and comes on top of a Federal budget running at a 6% deficit with an economy at full employment. As noted before, the biggest to tame long-end bond yields is not with clever financial manipulation, but by reining in government spending. There is clearly no will on either side of the political divide to reduce spending. Clearly the Fed needs to hike rates.
Talking of rate hikes, the ECB is all but certain to hike rates for a second time in this cycle. The question is whether it's second-and-out, or if they leave open the door for more hikes should the bias skew more to the upside as the Iran supports energy prices and starts to produce second order impacts. Although market pricing indicates another hike I think this will be the end of the hiking cycle with second order impacts looking modest for now as underlying inflation gauges look relatively calm. Headline inflation rose in August but core inflation eased. A 25bps hike to 2.5% takes the headline policy to the edge of neutral and it's hard to see how a restrictive policy stance can be justified - the economy is resilient, not blisteringly hot. The other question relates to how the ECB views the recent rise in bond yields. Whilst it has done some of the job for the ECB in tightening financial conditions – and supports the case for this hike to ‘second and done’ for now, it poses questions about debt sustainability for heavily-indebted Euro area members, particularly France. The ECB may start to worry again about spreads. For me the next thing to be looking at is not tweaks to interest rates but the prospect of the ECB restarting asset purchases to narrow spreads if things start to get messy ahead of the French presidential elections next year.
I've been reserving judgment on Burnham-omics because we don't really know what it is yet and figured the Budget would be the big reveal. But I think we can safely jump the gun a bit on this and say sterling should be lower and gilts are facing further stress. "We will do everything to support our national security,” Burnham said during PMQs yesterday, “but it can’t come at the expense of social security.” Repeat that for me please, Andy. Which can be read as 'we won't cut benefits to spend on defence', or worse yet – 'we'll try keep you safe but not at the expense at entitlement-based votes!' There is no plan. Actually, his plan is not to spend billions on defence now but instead spend those billions to build council houses, which apparently will "save billions from housing benefit". Only it will take years if not decades to make the savings count. Defence spending is needed now. These are not serious people. Gilt yields will go higher.
Elsewhere, ABF fell –10% to the bottom of the FTSE 100 as plans for its Primark brand to offer an online home delivery service in the UK were overshadowed by some weak numbers. Sales at the fast-fashion brand are seen down –3% on a like-for-like basis. For the full-year like-for-like sales at Primark are forecast down around 2.6%.
AI trade signals are still strong with TSMC, the world's largest contract chipmaker posting August revenue growth of 53% on surging AI demand. Adobe and Oracle report tonight - so more on the software vs hyperscaler view.
European stock markets opened mixed Thursday ahead of an expected rate hike by the European Central Bank after a resurgence in oil prices on Wednesday sent stocks down and bond lower. The FTSE 100 trades flat, steadying after a 4-day decline that's taken it to a 7-week low, while the CAC is showing a bit of strength to rise +0.25% in early trade.
Bond yields extended their push higher after the US Treasury announced a tripling of buybacks, which fell short of market expectations. The US 10-year yield held near Wednesday’s new cycle high of 4.85% after the plan to buy up to $6 billion of longer-dated debt disappointed some on Wall Street who had expected a bigger increase. Later on, a 10yr Treasury auction of 39bn bonds drew solid demand got off with a yield of 4.834%, shy of the highs. The 10yr kicked on further this morning to 4.86% as oil broke higher. With oil and yields up stocks ended lower with the S&P 500 –0.5% lower and Dow Jones –0.77%, while the Nasdaq fell –0.64%. Futures are mixed with the Nasdaq seen lower and DJIA and SPX trading a little firmer.
Treasury Sec Scott Bessent brought a pea shooter to a bazooka fight ... the $6bn fell short of market expectations for something much bigger, and perhaps signalled Treasury knows it cannot step in front of the fundamentals. Upping buybacks to $6bn from $2bn is a lot larger but it's in line with Bessent saying they could "at least" double buybacks – it lacked both the shock of a bigger operation and the awe of a clear commitment to do more. While the Bessent Put could get bigger if he wants to, risks to bond yields remain to the upside unless something material changes in terms of the fundamentals. For me that'll be a more assertive Fed, but I have doubts that it's prepared to be tough and not do Treasury's bidding... there's pain to come either for stocks or bonds - CPI inflation data has the steer tomorrow in terms of whether the Fed can step up to the plate next week. US PPI data is due up later, fc +0.3% month-on-month for core and +0.4% on the headline. There is also a 30yr Treasury auction this evening. This is one of the most complex macro setups I can recall.
The takeaway was essentially that Treasury is in theory providing support to liquidity and term premia, but not yet on a scale large enough to fundamentally change concerns about heavy government borrowing, large fiscal deficits and long-term Treasury supply + plus all the other factors that's driven bond yields higher like AI capex and structural shifts in who's buying government debt. It's hard to see what the plan is here - keep increasing and inviting the market to take on the house? How big is big enough? Treasury may be in a bind; do less and disappoint the market, do more and look like it's reason to be really worried (remember Bessent has all this asymmetric information, so if he is really increasing the buybacks say x8, x10 or whatever then it would look to Mr Market like there is a reason to sell bonds... Some further thoughts here on what the Fed should do.
Brent crude prices nudged $102 in early European trade after moving up on continued escalation in the Strait of Hormuz. Iran said it had hit 10 ships near the Strait after the US sunk 5 Iranian tankers in what's the biggest wave of attacks on shipping since the war began. There are no signs yet that a durable ceasefire is coming, let alone a return to the status quo ante. Brent neared $102 where it's facing the big horizontal resistance from the 23 July peak. Support is forming around the $101.30 level, the 22 May low that held before it gapped lower over the weekend of 23/24 May back to $95/96. An upside breach of $102 calls for return to 61.8% retracement Apr-Jul pullback at $105.
Don't worry the President has a timetable; Trump said yesterday that the war with Iran would end "immediately after the election." As night follows day, oil prices will “right after” the midterm elections, he asserted. Does he have a crystal ball? It seems oddly precise…maybe it’s asymmetric information of the kind his Treasury Secretary, Scott Bessent, aka The House, claims to have? The WSJ reports that Trump advisors think the war will go on until the end of his term as president...this is certainly plausible.
Anyone for stimmy checks? Remember when the US government poured petrol on the inflation fire with reckless handouts? Trump wants to do it again, only bigger, giving every American adult $5,000 if the Republicans sweep the boards at the midterm elections. Leaving aside the chances of the Republicans retain control of Congress, this would clearly be an inflationary impulse and comes on top of a Federal budget running at a 6% deficit with an economy at full employment. As noted before, the biggest to tame long-end bond yields is not with clever financial manipulation, but by reining in government spending. There is clearly no will on either side of the political divide to reduce spending. Clearly the Fed needs to hike rates.
Talking of rate hikes, the ECB is all but certain to hike rates for a second time in this cycle. The question is whether it's second-and-out, or if they leave open the door for more hikes should the bias skew more to the upside as the Iran supports energy prices and starts to produce second order impacts. Although market pricing indicates another hike I think this will be the end of the hiking cycle with second order impacts looking modest for now as underlying inflation gauges look relatively calm. Headline inflation rose in August but core inflation eased. A 25bps hike to 2.5% takes the headline policy to the edge of neutral and it's hard to see how a restrictive policy stance can be justified - the economy is resilient, not blisteringly hot. The other question relates to how the ECB views the recent rise in bond yields. Whilst it has done some of the job for the ECB in tightening financial conditions – and supports the case for this hike to ‘second and done’ for now, it poses questions about debt sustainability for heavily-indebted Euro area members, particularly France. The ECB may start to worry again about spreads. For me the next thing to be looking at is not tweaks to interest rates but the prospect of the ECB restarting asset purchases to narrow spreads if things start to get messy ahead of the French presidential elections next year.
I've been reserving judgment on Burnham-omics because we don't really know what it is yet and figured the Budget would be the big reveal. But I think we can safely jump the gun a bit on this and say sterling should be lower and gilts are facing further stress. "We will do everything to support our national security,” Burnham said during PMQs yesterday, “but it can’t come at the expense of social security.” Repeat that for me please, Andy. Which can be read as 'we won't cut benefits to spend on defence', or worse yet – 'we'll try keep you safe but not at the expense at entitlement-based votes!' There is no plan. Actually, his plan is not to spend billions on defence now but instead spend those billions to build council houses, which apparently will "save billions from housing benefit". Only it will take years if not decades to make the savings count. Defence spending is needed now. These are not serious people. Gilt yields will go higher.
Elsewhere, ABF fell –10% to the bottom of the FTSE 100 as plans for its Primark brand to offer an online home delivery service in the UK were overshadowed by some weak numbers. Sales at the fast-fashion brand are seen down –3% on a like-for-like basis. For the full-year like-for-like sales at Primark are forecast down around 2.6%.
AI trade signals are still strong with TSMC, the world's largest contract chipmaker posting August revenue growth of 53% on surging AI demand. Adobe and Oracle report tonight - so more on the software vs hyperscaler view.
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