London Quick Take - 5 Things to Know in Markets Today - 7 Oct

5 Things to Know in Markets Today

1. Defence sector hit. It was a tough day for defence stocks yesterday on reports Andy Burnham will delay a decision over when the government will increase defence spending until the autumn of this year hurt the sector. BAE Systems, Melrose and Babock led decliners on the FTSE 100, while Chemring and QinetiQ were chief fallers on the midcap FTSE 250, nursing heavy losses for the session. Delaying the decision clouds the outlook for some of these stocks, which had been seen as winners from a big spending splurge on the military. The fiscal arithmetic is not stacking up though. Chancellor John Healey needs to find an extra £4.7bn in defence spending and rebuild his fiscal buffer at a time when there are pressing needs for cash everywhere. 

2. This morning we have more political-market implications and a double-header for gilts: one The Times says publication of the Milburn review of welfare will be delayed until after the budget for fear the costs implied will overshadow the fiscal setpiece; and two, reports in the Guardian today that Burnham and co are drawing up plans to support poorer households with their energy bills. The paper says this will cost around £1bn but officials are also working on more radical changes to the way companies can charge customers. United Utilities and Severn Trent led the FTSE 100 lower. So, we have more costs - both real and implied - and more signals that the government is not about to slash the welfare bill. Bills are in the post. Delays to known spending commitments will only make forecasts and Budget assumptions less than credible. UK 10yr gilt yields have ticked up 5bps to 5.42% this morning, with sovereign fixed income displaying a bit of softness today with oil prices ticking back above the $101 level from $97 yesterday as Iran stepped up attacks on vessels transiting the Strait of Hormuz. Supplies continue to recover with Saudi Arabia now pumping 5.8mn bpd through the East-West pipeline. 

3. Back in France, 10yr OAT yields rose ~10bps this morning as some of the shine wore off from Marine Le Pen's fiscal plan announced yesterday, which had put a bid under OATs after the recent aggressive blowout. The fiscal plan aims at bolstering the National Rally’s economic credibility ahead of the 2027 election, capitalising on fears France is headed to a fiscal/debt crisis. She proposed €140 billion in net savings by 2032, a constitutional “golden rule” forcing annual deficit reduction, and a return below the EU’s 3% deficit ceiling by 2030. Markets assume the spending cuts are unrealistic, but it cut the extreme left tail a bit for bond markets as it least shows a willingness from the front runner to fix the problem. The rise in French yields coupled with rewidening of the Franco-German spread has pushed the euro lower this morning, with EURUSD back below 1.12.

4. Wall Street hits fresh record highs. It was a record day for SPX to join the Nasdaq at all-time highs as bond yields eased a bit though the 10yr Treasury remains at 5.3%, just a few ticks off the highs ...perhaps could see some further relenting in the pressure in sovereign debt for the near-term but I think any pullback will be temporary as it will only catalyse renewed risk-on sentiment. The S&P 500 rose 0.6% for a fresh record high and closed above 7,800 for the first time, while the Nasdaq Composite also made new intra-day and closing peaks as it rose +0.45%. Nvidia shares climbed over 1% as the company closed in on a $6 trillion market cap but closed the day almost flat. SpaceX likewise turned a +2.5% rally at one point to a gain of just +0.5%, as it maintained some momentum after the successful Starship launch last week. Morgan Stanley calls the stock ‘cheap’ and set a $300 price target ahead of the next test launch, though shares fell after hours on reports SpaceX is seeking $40bn in debt to buy Nvidia chips. Marvell Technology gained +6% as their Investor Day forecasts impressed. The maker of custom AI chips and networking gear raised its long-term financial targets substantially, with the 2028 revenue of $20bn well ahead of the estimated $18.2bn, whilst setting a FY31 sales target in a range of $70bn to $990bn. AMD rallied +3% on a monster price target hike by Citi to $800 from $575, with the chipmaker seen as the bigger winner from Meta’s Muse personal AI assitant. Intel is also seen as a winner from agentic AI ‘personal agents’. Muse is a big deal for Meta, according to Wells Fargo. Analysts see the company troughing earnings next year before it enjoys AI-driven growth cycle, taking the stock to $1,000 from $796 prior. Constellation Energy soared around +12% after announcing a long-term nuclear deal with Google.  

5. Low breadth but durable nonetheless? The rally is based on expectations for a powerful Q3 earnings impulse from the key protagonists as the AI buildout capex stretches out. FactSet data points to 29.5% earnings growth in Q3 year-on-year, which would be the third straight quarter with EPS growth +25%...at the same time yields have gone up, which has compressed valuations to around 19x from 23x at past peaks. AI and tech generally are driving the positive index moves. Indeed, this is a rally built on very narrow breadth as rate sensitive sectors have fallen – about a third of SPX stocks are higher now than the September low for the index. The market hasn’t done much since May but earnings estimates have risen at least 20% higher, and yields at +100bps, so this is a market that is confident that this earnings cycle can withstand higher rates. It won’t take much of a pullback in yields – say an Iran truce, or divided government in Washington capping the Treasury issuance upside – to see stocks kick on into the year end. Despite all the headwinds the strength of this earnings cycle is too hard to ignore and too resilient to get kneecapped by higher rates. The thing to remember is that in this inflationary dynamic and with bonds losing their hedging qualities against a deteriorating fiscal backdrop your primary defence against erosion of value is to be invested in equities. They generate real tangible earnings and growth, usually at least in line with inflation. 

Market snapshot: European equities are softer to start the session with the FTSE 100 down around -0.5%, while the CAC is off -0.6% along with the move in OATs and softness across fixed income weighing on stocks. Shell rose as it flagged strong refining margins and Brent crude trades firmer.