💡Quote of the week
“The US economy might be stuck in purgatory for a while. Forget inflation pressures — higher-for-longer borrowing costs are the new pain gauge for consumers and businesses.” - Conor Sen, Bloomberg columnist
Investment news
💵 Dollar takes a breather. In a surprising twist of events, the mighty dollar has paused for a breath, giving the yen and euro a much-needed respite. The abrupt halt in the dollar's surge came after cooler-than-expected U.S. private payrolls data raised doubts about the Federal Reserve's plans to hike rates this year. (CNBC, Reuters)
After soaring to an 11-month high earlier this week, the U.S. dollar index eased by 0.07% to 106.68. This dip followed Wednesday's revelation that U.S. private payrolls had grown less than anticipated in September. While more data is required to confirm the pace of the labor market slowdown, money markets have slashed their odds of a Fed rate hike in November, now seeing an 80% chance of the central bank maintaining steady rates.
Longer-term U.S. Treasury yields have also eased from their 16-year highs. The yen, which typically reacts to U.S. yields, is currently trading at 148.92, up 0.13% against the dollar. It had briefly touched 150.165 on Tuesday, its weakest point since October 2022.
The euro has shown signs of life, increasing by 0.13% to $1.0518 after hitting a year-low of $1.0448. Over the past three months, the euro has weakened by more than 14% against the dollar.
⭐ Gold shines again. Gold, the age-old haven for investors, is poised for a comeback, ready to end its eight-day losing streak - a record not seen since 2016. The rebound comes as U.S. bond yields and the dollar step back from recent peaks.
After enduring an uncharacteristic losing streak, gold is showing signs of resurgence. Spot gold marked a 0.3% rise to $1,826.49 per ounce on Thursday, attempting a recovery from its lowest levels since March, a low it hit earlier this week. U.S. gold futures also saw a gain of 0.3%, reaching $1,840.90.
🇪🇺 📈 European stocks recover. European markets on Thursday staged a rebound as U.S. Treasury yields retreated, prompted by weaker-than-expected job data. The Stoxx 600 index closed with a 0.3% gain, bouncing back from three consecutive negative sessions, and offering investors some respite. (CNBC)
The performance of various sectors was mixed, with travel stocks notably rising by 1.5%, hinting at increased optimism in the sector. Conversely, oil and gas experienced minor declines.
In a tumultuous start to the day, Alstom, the French train manufacturer, faced a staggering 37% drop in its stock price. The plunge followed a warning from the company regarding its free cash flow, raising concerns among investors.
🎢 Rollercoaster ride. Britain's Metro Bank found itself in a financial storm as its shares nosedived by over 29% in a tumultuous trading session, prompting trading suspensions. The bank's woes come amidst reports of its attempts to secure £600 million ($727 million) in debt and equity. (CNBC)
The London Stock Exchange, the platform where Metro Bank is listed, confirmed to CNBC that the brief suspensions were enacted in response to the extreme volatility exhibited by the bank's shares.
🏦 🇮🇹 Italian banks may dodge Meloni's tax. Italy's banking sector is poised to take a strategic route to avoid the country's newly imposed tax, with many institutions opting to fortify their capital reserves instead. Analysts and experts predict that the design of the law, recently passed by the Italian Parliament, will enable most banks to meet the opt-out conditions while upholding their commitment to shareholder payouts. (Bloomberg)
Following the adoption of a new tax law by the Italian Parliament, it appears that most of Italy's banks are gearing up to sidestep the tax and, instead, choose to reinforce their capital buffers. The law, introduced in response to a deficit budget effort led by Italy's right-wing government under Prime Minister Giorgia Meloni, has been structured in a way that allows banks to avoid the levy if they channel funds into bolstering their reserves.
The tax law initially proposed by the Meloni administration in August faced significant backlash as it triggered a sharp decline in bank stocks and drew a warning from the European Central Bank. Subsequently, the law was softened before its passage through parliament.
🏚️ German property crisis hits developers hard. Germany's once-thriving real estate market is grappling with a crisis, and it's the developers who are feeling the heat. Despite the spotlight being on landlords in the current property turmoil, it's the companies responsible for building projects who are facing imminent insolvency. Rising construction costs, increased interest rates, and declining property values have created a perfect storm for developers. (Bloomberg)
A property market that once thrived on low-interest rates and a surge in investor demand is now facing a severe crisis. While much attention has been directed toward landlords during this challenging period, it's the property developers who are facing the brunt of the turmoil. Recent developments, such as the insolvency filing of Gerch Group, highlight the precarious situation faced by these developers.
Gerch Group, which has approximately €4 billion ($4.2 billion) worth of projects in progress, has filed for insolvency proceedings, casting doubts on the completion of its Quelle building redevelopment project. Munich's Euroboden and Project Immobilien Group are also grappling with preliminary insolvency proceedings, adding to the sector's woes.
📸 Image of the week
Opinion
🤔 The US economy’s new challenge. The U.S. economy is grappling with an unexpected challenge - soaring borrowing costs, driven by surging long-term interest rates, even as inflation recedes. This predicament is vexing consumers and businesses and requires attention from both policymakers and politicians. (Bloomberg Opinion)
The Federal Reserve has managed inflation and unemployment remarkably well. Yet, despite their efforts, economic confidence has not rebounded as expected. The surge in interest rates, particularly at the long end of the bond market's yield curve, is a significant contributing factor. Mortgage rates, for instance, are increasing even as inflation subsides, a situation that defies conventional economic wisdom.
The rising interest rates, adjusted for inflation, result in higher real interest rates. This means that, in practice, households and businesses are paying a premium above the Treasury rate. For instance, 30-year mortgage rates currently exceed 7.5%, while market expectations of future inflation stand at approximately 2.3%. This significant gap of more than 5 percentage points is unprecedented since the 1990s.
What else is happening
🇷🇺 Deadly Russian missile strike. Ukraine is reeling from a devastating Russian missile attack that claimed the lives of at least 49 people and left seven others injured in the eastern Kharkiv region. This horrifying assault stands as one of the deadliest attacks against Ukraine's civilian population in months. (Bloomberg)
President Volodymyr Zelenskiy swiftly condemned this act of violence, categorizing it as a "completely deliberate act of terrorism." Zelenskiy is currently in Spain, where he is engaging with European leaders to rally support and solidarity in the face of Russia's ongoing invasion.
⚔️ Poland's election stokes tensions with Germany. As Poland's nationalist government, led by the Law and Justice (PiS) party, vies for an unprecedented third term in office, it has found an unexpected target close to home: Germany. In the run-up to Poland's October 15 election, PiS leaders have accused Germany, their NATO ally and largest trading partner, of meddling in Polish governance, particularly on issues like migration and gas policy. (Reuters)
This brewing feud is not only straining relations between the two nations but also undermining Western support for Ukraine in its conflict against Russia.
A joint Polish-German tank repair plant project for Ukraine, aimed at providing support in the aftermath of Russia's aggression, has been derailed due to the feud.
PiS leaders have also alleged that Germany is plotting to reinstate Donald Tusk, a former Polish prime minister, who is a prominent opponent of PiS. They have harnessed historical mistrust of Germany, particularly among elderly conservative voters with memories of World War Two.
And finally…
🗻 Mont Blanc shrinks. Western Europe's highest peak, Mont Blanc, has lost more than two metres (6.5 ft) in height over the past two years, French researchers found. (Reuters)
The mountain now measures 4,805.59 meters, compared to 4,807.81 meters in September 2021. Experts suggest that climatologists and glaciologists will analyze the data to investigate the causes of this phenomenon, which is likely linked to climate change.
See you next week!
