London Quick Take - 5 Things to Know in Markets Today - 8 Oct

5 Things to Know in Markets Today

1. Stock markets are wobbling under the weight and cost of capital as bond yields rise, while a fresh spike in oil has spooked the market further. Fresh pressure on French debt yesterday stoked further losses across the sovereign debt space, weighing heavily on European stock markets, with the Stoxx 600 down –1% for the session and Stoxx 50 -1.5%. The FTSE 100 shed about 0.6% to below 10,400 in early trade Thursday, the lowest since 23 June and extending losses after it had closed below its 200-day moving average at 10,468 yesterday. European stocks were down hard again on Thursday with fresh Iran war and bond scares to contend with, and without much in the way of AI offset. The CAC tumbled -1% after down -1.22% on Wednesday as French assets are the focal point of stress in the bond-stock complex. Banks are similarly feeling a lot of the pressure with the sector hit hard by the stress in fixed income.

2. The bond rout continues with the US 10-year Treasury yield hitting a fresh 24-year high 5.365% before backing off a shade as strong demand at a Treasury 10yr auction helped calm some nerves. After hitting that high the 10yr backed off to 5.28% but has risen 5bps again today to 5.33%. French yields are also under fresh pressure from mounting concerns over FFF (France’s Fiscal Fragility) adding to the broader pressure on global sovereign debt markets. French 10yr OAT yields +5bps and Franco-German spread widening out to 142bps weighing on the euro, which is back below $1.12 and near 17-month lows. Investors aren’t keen to load up on these rates yet because bonds are still very volatile. This applies to stocks too but AI stocks are immune right now, which has kept US indices firmer while European bourses suffer. Reports SpaceX, Oracle and Broadcom are lining up tens of billions of dollars in financing for AI hardware seems to have added to pressure across the fixed income space. FOMC meeting minutes revealed last month’s vote to raise interest rates was unanimous among the 19 members. There was a clearly hawkish vibe as most also judged that another hike this year would likely be appropriate. Latest PCE inflation and jobs data indicate that the Fed might not rush into back-to-back hikes with another 25bps increase at its late October meet, but the bond market is saying fed funds rate needs to be about 100bps higher at this stage. 

3. Oil jumped on reports the US is preparing to escalate military action against Iran. Brent crude trades nearly 4% higher, touching $104, though this is pure headline premium and nothing concrete is known. Axios said the Pentagon instructed US Central Command “several days ago to conclude preparations for resuming major combat operations”. Although the report said the directive made no mention of a timeline and President Trump has not taken any final decision, sources said it could happen before the midterm elections. European natural gas futures more than €80/mwh, while diesel has surged back towards $200 per barrel after falling below $180 on Friday.

4. Wall Street retreated from its record highs, but after a tough open the bulls circled the wagons and kept losses light for the session as the Treasury auction helped calm some of the upwards pressure on yields. The S&P 500 finished just –0.22% lower at 7,801, well off the lows of the day. NDX similarly opened down sharply before closing –0.21% lower for the day. Industrials led the losses, while some megacap tech firmed up to staunch losses at the index level. Google rallied +0.8% despite being ordered to halt work on two datacentre projects in Finland. Make no mistake this ramp in yields is causing a lot of damage under the hood. 

5. Tesco shares approach 15-year high: Tesco shares jumped 4% to 496p, nearing its YTD and 15yr peaks at 510p after a positive set of interim results delivered a small profit upgrade and bigger share buyback. Revenues were up 2% and adjusted operating profit +6.5% to £1.78bn. Management raised its AOP guide for the full year to £3.15bn to £3.3bn, from a previous £3-3.3bn. It stuck to its free cash flow guidance for the full year at £1.5-2 bn, though at the half-year mark it’s already hit £1.57bn, so I wouldn’t be surprised if this is surpassed in the end. Like-for-like sales growth of 1% was modest but core UK Food sales were +2.4% higher, with support from the 9% growth in Finest. Wholesale business Booker was weaker with LFL sales –2.6% lower, but this was a strong performance against a slate of macroeconomic and consumer headwinds. 

Market snapshot: European equities down hard with CAC -1%, DAX -0.8% and FTSE -0.6% in early trade with 10yr French bond yields trading about 5bps higher. US futures are lower to extend Wednesday's pullback from the record highs.