Markets
French street protests violently escalated over the weekend. What began as localized student and education-related unrest a month ago has transformed into a broad-based uprising against the rising cost of living, declining public services, and widespread frustration with the Macron administration. French policymakers find themselves in a difficult position, striving to address domestic civil unrest while simultaneously managing intense pressure from international bond markets as they attempt to steer next year’s budget through parliament. Traders are keeping a close watch on French government bond (OAT) spreads this morning, which face the risk of widening again. The euro has shown a strong correlation with these spreads recently and experienced a sharp decline during Asian trading this morning. The EUR/USD pair fluctuated between 1.1240 and 1.1180, while EUR/GBP briefly touched 0.84 for the first time since June of last year.
Energy prices and persistent inflation risks remain key focal points for the markets. Brent crude oil tested the $110 per barrel resistance level on Friday. The market is entering the final phase of a technical bullish triangle pattern, indicating a potential upside breakout that could push oil prices to their highest levels since May. European natural gas prices, measured by the Dutch TTF benchmark, are approaching €90 per megawatt-hour for the first time since December 2022. Multiple factors are keeping energy prices elevated, including increased Iranian attacks on vessels in the Strait of Hormuz, accusations from Kyiv regarding U.S. President Trump’s efforts to pressure Ukraine into a settlement with Russia, a U.S. congressional backlash against a diesel deal between the U.S. and Russia, and warnings from energy agencies that the market will remain in deficit for longer. Beyond the inflationary risks posed by this prolonged supply shock, last week saw a trifecta of stronger-than-expected U.S. inflation data (CPI, PPI, and import/export prices), pointing to significant upside risks for the Federal Reserve’s preferred PCE inflation gauges. Although the central bank is likely to pause rate hikes in October, the pressure to tighten policy further at subsequent meetings remains high.
The final key theme likely to influence today’s trading session, despite a very light economic calendar, is broader market sentiment. Major U.S. indices fell by as much as 2.15% for the tech-heavy Nasdaq as the correction in AI-related trades continued. CoreWeave is at the center of the scrutiny, with the cloud infrastructure provider’s aggressive debt accumulation to fund AI expansion facing close examination. In addition to equity market weakness, last week saw a notable rebound in core government bonds. Particularly at the longer end of the yield curve, bonds fulfilled their role as safe-haven assets. Asian trading this morning points to a calmer start to the week, with South Korean markets—often used as a proxy for AI trade sentiment—managing to reverse 3% opening losses into a 1% gain. Q3 earnings from Meta, scheduled for release on Wednesday, will serve as the next critical benchmark for assessing the viability of AI investment valuations.
News & Views
China’s economy expanded at a faster-than-expected 1.2% quarter-on-quarter in the third quarter. This represents an increase from 0.9% in the previous quarter and surpasses the 1% consensus estimate. On a year-on-year basis, growth reached 4.5%, slightly exceeding forecasts and the 4.3% pace of the second quarter. For the year to date, economic growth stood at 4.6%, aligning with the country’s official target range of 4.5% to 5%. In the accompanying September data release, industrial production accelerated to 5.5% year-on-year, the fastest pace since March, driven by robust export demand. However, the gap between production and domestic consumption remains pronounced, with retail sales showing a modest recovery but remaining subdued at 1.1% year-on-year. Capital spending declined by 7.2% year-to-date, matching August’s multi-year lows, and real estate market indicators remain weak. Property investment plunged by 20.6% year-to-date, down from a 19.9% decline in the previous month, while residential sales fell by 13.7% (from 13.1%). The unemployment rate decreased marginally to 5.2% from 5.3%. Meanwhile, the Chinese yuan strengthened to its highest level against the U.S. dollar since mid-2023, with USD/CNY trading around 6.68.
Belgian budget negotiations over the weekend again failed to yield significant progress. A proposal by Prime Minister De Wever to draft an emergency 2027 budget first and negotiate the broader €10 billion fiscal consolidation plan in a subsequent phase was set aside. Coalition parties insisted on conducting the entire exercise simultaneously. However, an alternative proposal put forward by the Prime Minister on Sunday evening was rejected by the Vooruit, CD&V, and Les Engagés parties, who deemed it unbalanced and unacceptable. The Prime Minister is scheduled to hold bilateral talks with individual parties later today in an effort to break the deadlock.
