Bonds and equities trade heavy in slow start to the week

In focus today

Today the Hungarian Central Bank will announce its rate decision, with the market expecting the policy rate to be kept at 6.5%.

Otherwise, market focus will remain on the earnings season and central bank communication following a poor start to the week for most asset classes.

Economic and market news

What happened yesterday

In the US, Treasury yield on the benchmark 10-year bond rose as high as 4.17%. Wall Street lost ground after strong gains last week as indices were down, see the equities section below. Investors are awaiting earnings for 114 S&P 500 companies throughout the week, including Tesla TSLA.O, Coca-Cola KO.N and Texas Instruments TXN.O.

Generally, the hawkish side of the Fed was on the wire yesterday, advocating for a data-driven and gradual cutting cycle approach. For instance, Daly (voting member) was concerned about tight policy impacting labour markets, supporting rate cuts if inflation continues lower. Non-voting member Schmid highlighted that the Fed should focus on minimizing financial market volatility when cutting rates, while Kashkari mentioned that rates could be cut faster if labour market weakens significantly.

In the EU, the European Central Bank Policy maker Gediminas Simkus (hawk and voting member) said the ECB is likely to cut key interest rates down to its 'natural' level between 2% and 3%, however further cuts may be necessary if the fall in inflation becomes entrenched.

In the UK, Bank of England interest rate-setter Megan Greene (hawk) said the central bank should stick to gradual rate cuts given the uncertainty of consumption. This comes as British inflation fell below 2% and Bank of England Governor Andrew Bailey (dove) saying that the central bank could move aggressively if inflation pressures continued to weaken. Investors are expecting a 25 basis-point reduction in the bank rate at both Bank of England's November meeting and December meeting, whereas our base case is for Bank of England to cut in November but stay put in December.

In Oil markets, prices gained following last week's more than 7% decline. This comes as tensions rise in the Middle East following Israeli forces besieging hospitals and shelters in the northern Gaza Strip. Meanwhile investors continue to evaluate the size of the expected Israeli retaliatory attack on Iran as a response to the ballistic missile attack on 1 October. 

Equities: Global equities closed lower yesterday, with broad-based declines across regions. The US stood out on the strong side, showing strength particularly in the technology sector, which contributed to another day of cyclical outperformance. There was scant macroeconomic data, but the data available, such as the falling German producer prices - which continue to surprise on the downside - suggests that lower yields could be anticipated. Therefore, it is difficult to attribute the rise in yields yesterday to inflation, especially noting that the long end of the curve saw the most significant increase. Clearly, several factors are at play here, as evidenced by the unusual sector rotation observed yesterday. In the US yesterday: Dow -0.8%, S&P 500 -0.2%, Nasdaq +0.3%, and Russell 2000 -1.6%. Most Asian markets are lower this morning, with China bucking the trend. Futures in Europe are presenting a mixed picture, while in the US, futures are lower this morning.

FI: There was a substantial rise in global bond yields yesterday on the back of rising oil prices and concerns about fiscal policies. Hence, 10Y US Treasury yields rose some 10bp, while 2Y US Treasury yields rose 7bp. There was a similar move in Europe, where the move was led by Italy as 10Y Italian yields rose some 15bp, while Bunds rose 10bp.

FX: The USD dominated majors and saw broad gains yesterday with EUR/USD falling close to 1.08 and USD/JPY rising firmly above 150. For Scandies, it was a relatively quiet day. Both EUR/SEK and EUR/NOK traded in tight ranges.