US equity futures are weaker with small caps underperforming while Treasuries erased some of the previous day’s gains as escalating tensions in the Middle East spooked traders and sent oil sharply higher for a second day after Iran fired about 200 ballistic missiles at Israel, drawing a vow of retaliation from Prime Minister Benjamin Netanyahu and further raising the risks to crude supplies from the region. As of 8:00am ET S&P futures were down 0.2% but off the worst levels of the session following yesterday’s flight to safety; as shown in the chart below the cash index has been largely flat for the past 2 weeks. Nike shares are set to fall after the firm withdrew its guidance and KKR is weighing a takeover bid for an Asian chipmaker. Nasdaq futures were also in the red with Mag 7 names all lower ex-META. Europe’s stocks benchmark erased earlier gains. The China bid continues with HK +6.2% as property (+14%) and tech (+8%) power the region higher. Japan PM Ishiba said this morning that Japan is not in environment now for additional rate hike & will coordinate with BOJ on economy while ECB member Kazaks said an October cut was likely but warned against aggressive easing expectations.FTSE +5bps/DAX -45bps/CAC -5bps/ Shanghai closed/Hang Seng +6.2%/Nikkei -2.18%. TSLA reports sales numbers today. Bond yields are higher 3bps to 3.76% compared with a low of 3.69% on Tuesday when demand for havens fueled appetite for government bonds. The dollar was flat while commodities were well bid across all three complexes with crude the unsurprising standout as Israel focuses on delivering a ‘significant retaliation’ sending Brent crude climbed toward $76 a barrel (it was below $70 at one point yesterday) as it prices in a renewed risk premium for the world’s most important commodity, given the Middle East accounts for about a third of global supplies. Looking at today's calendar we get the ADP private payrolls, as well as 3 Fed speakers; geopolitics will remain in focus. Vance decisively won last night’s VP Debate, but it is unclear how this will move the polls.
In premarket trading, JD Sports Fashion Plc fell after reporting results; Nike Inc. fell as much as 5.7% in premarket trading after the company scrapped its full-year sales guidance citing leadership transition later this month. Nike is facing one of its roughest patches in decades, moved to reset Wall Street’s expectations ahead of new Chief Executive Officer Elliott Hill’s arrival. Here are some of the biggest US movers today:
Middle East escalations have taken center stage as Israel vowed significant retaliation after Iran fired up to +150 ballistic missiles at the country yesterday. This stood out from Axios: “Israeli officials staring down all-out regional war tell Axios Israel will launch a "significant retaliation" to Tuesday's massive missile attack within days that could target oil production facilities inside Iran and other strategic site.”
“Clearly there is a lot of uncertainty,” Anna Rosenberg, head of geopolitics at Amundi Asset Management, told Bloomberg TV. “Nevertheless I think the market is still very much operating in the base-case expectation that it remains more or less contained and doesn’t spiral out in an all-out war. And I think right now, that is the right thing to do.”
European stocks have pared an earlier gain to trade little changed, with the energy sector outperforming as investors assess the escalating crisis in the Middle East as well as the impact of more stimulus in China. Oil producers rise as crude prices extend gains, while real estate stocks and utilities are the biggest laggards. Here are some of the biggest movers on Wednesday:
Elsewhere, Chinese stocks listed in Hong Kong jumped the most in almost two years after Beijing followed other major cities in relaxing home purchase rules. HK surged 6.2% as property (+14%) and tech (+8%) power the region higher; property developers led the rally, with a gauge of the sector surging as much as 47%, while an index of brokerage shares jumped 35%, both record intraday moves. There’s growing optimism China’s recently announced stimulus blitz has brought an end to the three-year slide in Chinese shares that was driven by the stuttering economy and a multi-year property crisis.
In FX, the yen is the weakest of the G-10 currencies, falling 0.5% against the greenback after Bank of Japan Governor Ueda sent dovish signals regarding the policy outlook and after Japan’s Prime Minister Shigeru Ishiba said the environment doesn’t call for raising interest rates again. The Bloomberg Dollar Spot Index is little changed.
In rates, US yields are cheaper by 1.5bp to 4bp across the curve near session highs, 10-year by nearly 3bp on the day with bunds and gilts in the sector lagging by an additional 2.5bp and 4.5bp. Gilts lead a selloff in European government bonds, with UK 10-year yields rising 7 bps to 4.01%. US 10-year yields climb 3 bps to 3.76%.
In commodities, oil prices climbed for a second day after Israel vowed to retaliate against Iran after it fired ballistic missiles at Israel in a severe escalation of hostilities. WTI is up near 3% to around $71.85 a barrel. Spot gold drops ~$9, paring some of Tuesday’s safe-haven led rally.
Looking at today's calendar, US economic data includes September ADP employment change at 8:15am. Fed speakers scheduled include Hammack (9am), Musalem (10:05am), Bowman (11am) and Barkin (12:15pm)
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mixed with some cautiousness seen amid heightened tensions in the Middle East after Iran conducted a missile attack on Israel. ASX 200 was rangebound as gains in the commodity-related industries offset the losses in the tech and consumer sectors. Nikkei 225 slumped at the open and retreated beneath the 38,000 level after the prior day's currency strength. Hang Seng resumed its China stimulus-spurred rally on return from the holiday with notable strength in tech and property.
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European bourses, Stoxx 600 (+0.1%) opened on a tentative footing, however, sentiment gradually improved as the morning progressed, with indices now generally in positive territory to varying degrees. In recent trade, bourses have edged slightly off best levels. European sectors are mixed; Energy tops the pile, propped up by the geopolitical-induced strength in oil prices; a factor which has weighed on Travel & Leisure names. Consumer Products is also towards the top of the pile, assisted by gains in Luxury amid continued optimism surrounding China on its return from Holiday. US Equity Futures (ES -0.2%, NQ -0.2%, RTY -0.6%) are modestly lower across the board, continuing the weakness seen in the prior session with slight underperformance in the RTY.
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DB's Jim Reid concludes the overnight wrap
Markets got Q4 off to a turbulent start yesterday, with a sharp risk-off move after the White House said they had indications that Iran would imminently launch a ballistic missile attack against Israel, something that materialised only a few hours later. From a market perspective, the reaction was swift, and Brent Crude oil prices surged by around $3/bbl immediately after the news came out, as investors rapidly sought to understand if this could become a wider regional conflict across the Middle East. Risk assets reversed some of their sell-off later on but it was still a tough start to the quarter
The retracement of risk assets from their peak move lower came as parallels to Iran’s attack on Israel back in April, which did not lead to a broader escalation, emerged. Both instances saw similar reports come through in advance that an Iranian attack was about to happen, and this time Israel again said that it shot down most of the missiles and reported few casualties. That said, there were some indications that escalation risks might be higher this time around. The Pentagon said that this attack used around twice as many ballistic missiles as the one in April, while Iranian commentary was more ambiguous on whether the attack would be one-off. Israel’s PM Netanyahu said that Iran “made a big mistake tonight, and will pay for it”, while Iran’s Revolutionary Guard threatened a “crushing” response if Israel retaliated.
The events drove a geopolitical risk-off tone, with clear ramifications across multiple asset classes. Oil prices were most directly affected by the news, with Brent crude seeing its largest intra-day move since April 2023, trading below $70/bbl early on before peaking above $75/bbl as news of Iran’s strikes came in. It retreated slightly later on but is trading around $74.60/bbl as I type this morning. By comparison, back in April we saw oil prices hit their intraday highs for the year, at just above $92/bbl, just prior to Iran’s attack. But then oil prices began to fall back in the days that followed as the White House sought to avoid an escalation, and as tensions eased.
The risk-off backdrop weighed on equities, with the S&P 500 (-0.93%) seeing a sizeable fall from its all-time high the previous day, although it did partially recover after trading -1.4% lower. The more cyclical sectors led the declines, with the information technology sector down -2.66%. The Magnificent 7 fell -1.32%, whilst the small-cap Russell 2000 also underperformed (-1.48%). In Europe, the STOXX 600 had been up +0.51% intraday just before the headlines came out, but reversed course to close -0.38% lower. In other assets, a move towards 'safe havens' saw gold rise +1.09% higher to $2,663/oz.
Over on the rates side, a rally for bonds was accelerated by the Middle East headlines, though by the close Treasury yields were only slightly lower than before the news broke. On the day, 2yr yields were -3.6bps lower to 3.61% while 10yr yields were down -5.0bps to 3.73%, their sharpest daily decline in three weeks. This morning in Asia 10yr yields have edged back up to 3.74%.
Bonds had already rallied earlier in the day after the latest US data, which added to the signs that the labour market was weakening. It’s true that job openings were stronger than expected in August at 8.040m (vs. 7.693m expected), but the other details in the report generally pointed in a more negative direction. For instance, the quits rate of those voluntarily leaving their job was down to 1.9%, the lowest since June 2020, and below its pre-Covid levels. So that was a fresh sign that people’s confidence in the labour market is still weakening, and the hires rate also fell back a tenth to 3.3%, in line with its joint-lowest since the Covid-19 pandemic. That was backed up by the ISM manufacturing too, which remained at 47.2 in September (vs. 47.5 expected), whilst the employment component weakened to 43.9.
Over in Europe, the sovereign bond rally was even larger, which came as Euro Area inflation fell beneath the ECB’s 2% target for the first time since June 2021. Specifically, headline CPI was down to +1.8% in September on the flash reading, which cemented investors’ conviction that the ECB was likely to accelerate its rate cuts and move again at the October meeting. Core CPI was a little stronger at +2.7%, but that was in line with expectations, and the news helped yields fall across the continent. Indeed by the close, yields on 10yr bunds (-8.8bps) were down to 2.03%, which is their lowest closing level since January. And the 2yr German yield (-4.7bps) was down to 2.01%, which is its lowest since December 2022. The combination of lower European rates and geopolitical risk-off saw the euro post its worst day against the dollar in over three months (-0.84%).
It was France that saw the biggest sovereign bond rally, however, which came as PM Michel Barnier delivered his first speech to lawmakers. From a market standpoint, the main headline was that France would be delaying its target to get the budget deficit beneath 3% of GDP from 2027 to 2029, and that they’d aim to cut the deficit to 5% of GDP next year. In turn, yields on 10yr OATs were down -10.0bps yesterday to 2.81%, and the Franco-German 10yr spread tightened a bit to 78bps, its tightest level in a week.
Asian equity markets are mostly lower this morning with the heightened geopolitical tensions. The Nikkei is leading the declines at -1.85%, followed by the KOSPI at -0.66% and the S&P/ASX 200 at -0.09%. In contrast, the Hang Seng is up by +6.02%, reflecting continued China optimism after its public holiday on Tuesday. Markets in mainland China are closed for the Golden Week holiday and will remain shut until the 8th. S&P (-0.2%) and Nasdaq (-0.15%) futures are edging lower. A quick skim at the headlines around the US VP debate don't seem to suggest anything that's moved the needle in this very tight election. I can't pretend I was awake to watch it though.
Early morning data showed that South Korea’s inflation cooled more than anticipated in September, rising +1.6% y/y (v/s +1.9% expected), marking the weakest annual increase since February 2021 amid growing expectations of an imminent policy easing. It follows an increase of +2.0% in the prior month.
To the day ahead now, and data releases include the Euro Area unemployment rate for August, and in the US there’s the ADP’s report of private payrolls for September. Central bank speakers include ECB Vice President de Guindos, and the ECB’s Kazaks, Lane, Simkus, Elderson and Schnabel, along with the Fed’s Hammack, Musalem, Bowman and Barkin.
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