European markets have got the week off to a poor start as concerns around sticky inflation, and low growth (stagflation), or recession have served to push yields higher and equity markets lower.
Europe
Worries over the property sector in China aren’t helping either after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt.
This is prompting weakness in the basic resources sector, along with other companies exposed to the region, pulling the FTSE100 to a one week low.
The increase in yields is being manifested in German and French 10-year yields, both of which have risen to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40. There could also be technical factors at play here with both European benchmarks falling below their 200-day SMAs in the last day or so, while the DAX has slipped below 15,400 and to its lowest levels since late March.
Amongst the biggest fallers on the FTSE100 has been the gaming sector with Entain, the owner of bookmakers Coral and Ladbrokes, falling sharply below its 2022 lows, and to levels last seen in November 2020, after the company warned that net gaming revenue was likely to be lower due to weaker than expected performance in its Australian and Italian markets. Q3 online NGR is expected to rise by a high single digit percentage. Also feeling the pressure is sector peer Flutter Entertainment which appears to be drifting back towards its August lows.
Also weaker are tobacco stocks on reports over the weekend that the UK government is considering even stricter restrictions on the sale of cigarettes by increasing the legal smoking age for cigarettes in a way that would mean anyone born after 1st January 2009 would be unable to legally buy tobacco. Imperial Brands shares have fallen below the lows for this year, and their lowest level since May 2022. British American Tobacco shares are also lower.
Amongst the gainers AstraZeneca has edged higher due to a broker upgrade to buy on optimism over its drugs pipeline outside of Oncology.
US
US markets have continued to look soft in the face of rising yields with the S&P500 opening at a 3-month low, as US 10-year yields continue to push to fresh 15-year highs above 4.5%. Concerns over a looming US government shutdown on 1st October may also be impacting on sentiment.
Chinese electric truck manufacturer NIO shares have dropped back to their lows of the year after reports that it is considering a plan to raise $3bn in the form of new shares.
Media companies are seeing some interest today on reports that the Hollywood strikes could be about to come to an end. Reports of a preliminary agreement between the studios and writers has helped to give a lift to the likes of Paramount, Netflix, and Disney.
Amazon shares are bucking the wider negative trend after announcing that it would be investing up to $4bn in AI startup Anthropic.
FX
Rising yields are once again driving sentiment today with the US dollar continuing to lead the way pushing to its highest level this year against a basket of currencies.
The push higher in the greenback has seen the euro slip below 1.0600, for the first time since March, and the pound dip below 1.2200, as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy.
The US dollar has also continued to gain against the Japanese yen, hitting its highest level this year, as it looks to close in on the 150.00 area, after Bank of Japan governor Ueda said that the Bank of Japan needs to continue with monetary easing and that its inflation target isn’t in sight yet. He’s right about that in one sense, in that its well above it, which makes these comments even more surprising given that core inflation has been above 4% for the past 5 months and matching a 40 year high of 4.3%.
Commodities
With the US dollar once again on the front foot and yields edging to their highest levels since 2007, gold prices are struggling close to their recent peaks. The failure to crack $1,950 last week and the quick retreat suggest the bias for a move back to this month’s low near the $1,900 area.
Crude oil prices continue to look well-underpinned despite concerns over the sustainability of higher prices in the face of their possible impact on demand. The next key target remains at the November highs from last year, just above $100 a barrel on Brent with the lack of any dip projecting a concern that OPEC+ will keep its production cap intact beyond the end of this year.
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