Opening higher (Eurostoxx futures +0.8%, S&P +0.2% and Nasdaq +0.2%) after a session yesterday of some refuge in sovereign debt amid fears of AI, with yields hitting lows for several weeks (T-bond -13 bp to 5.06%). Today the markets open somewhat calmer after Kevin Warsh's remarks, rating investment in AI as "enormous benefit" and reminding that the Fed "withdrew a dose of accommodation in September", which moderates the probability of +25 bp on 28 October to only 15% vs 25% previously and allows the Nasdaq future to bounce back from -0.5% prior to his remarks. On 16 November, the Fed's working group dedicated to productivity and employment could shed light on the expected impact of AI on growth and inflation.
Nevertheless, the market continues to price in 3 Fed rate hikes in the next 12 months in light of the promise of price stability. We believe that the energy shock, the state of public finances, and the competition for capital (AI vs sovereign) limit the scope of such a rotation, as does the strength of the American economy, where yesterday we saw solid figures for retail sales, weekly employment, and a much higher than expected rise in producer prices, which continues to exert upward pressure on inflation, intervention rates, and yields. Today attention is on import prices and industrial production.
Investors are also keeping an eye on geopolitical risk, with energy prices remaining tense (Brent 105 usd/b, TTF 85 eur/Mwh), with rumours that the US could make new concessions to Russia (relaxing restrictions on the "ghost fleet" to ease energy prices), leading Ukraine to resume attacks on Russian refineries. Likewise, the risk remains high in the Strait of Hormuz and Saudi infrastructure, and the war with Iran increasingly resembles a structural supply shock, which will keep energy expensive for a while and with a significant increase in tanker rates due to higher freight costs.
Regarding the theme of AI, today the Kospi rebounds +3% after -22% in 7 sessions, supported by Samsung (+5%) and SK Hynix (+3%) and following good results and guidance from TSMC (6% above consensus), although the reason for the rebound has been more in Warsh than in the fundamentals.
In Asia, we highlight negatively Indonesia, where the Jakarta index -11%, its worst session since January 1998 following MSCI's warning that the country could lose its emerging market status, which could trigger forced sales in emerging funds with exposure to the country.
In Europe, France returned yesterday to finance itself in the debt markets after the latest auctions a month ago. The State has raised 12,000 million euros, at the high end of the expected range (10,000/12,000 million euros), with a coverage for the 4 issues (between 4.3 and 7.1 years residual) between 2 and 2.5x, slightly lower than in September (2.2-2.9x) due to the greater perceived risk by investors, which has also led the State to offer higher rates. The average rate for the issue maturing in February 2031 (4.3 years) rose to 4.01% from 3.78% in September and the one for the issue maturing in February 2032 (5.3 years) rose to 4.16% from 3.92% in September, in line with current yields.
Today the macroeconomic focus will be on the final CPI for September in the Eurozone which we expect will confirm the notable rise in the preliminary year-on-year figure (3.8% vs 3.2% previous and vs inflation target of 2%), resulting from the energy component, and which maintains pressure for new rate hikes from the ECB (three more hikes priced in by the market in the next 12 months, the first of which in December, with only a 10% probability of a hike in October) following those already materialised in June and September.