Oil surges, yields spike and central banks take centre stage

0:00Welcome to Julius Baer's Moving Markets podcast on Thursday, the 10th of September, with me, Bernadette and Eirko. The US Treasury Department said yesterday that it will buy back up to $6 billion US dollars of government debt in an operation aimed at keeping bond markets functioning. That triples the normal buyback operation. But is it enough to start driving long-end bond yields down? Well, here to discuss the details of that with me later is our sponsor Borgiaz from our Fixed Income Research team. But first for a roundup of all the latest financial news, I'm joined by the head of Product and Investment Content at Julius Baer, Roman Kenciani. Good morning, Roman, and welcome to the show. Good morning, Bernadette, thanks for having me. So yesterday we saw quite a pullback in European equities, perhaps you could paint a picture of what transpired. Absolutely. It was a decidedly risk-off session across Europe, the stock 600 fell 1.4%. Hitting lows, we haven't seen since late July, that really on the

1:02course the anxiety is currently swirling around. The primary driver was escalating tensions in the Middle East, pushing the brain crude above that psychologically important 100-year-old solar barrier. Naturally, that fuels worries about energy supply, persistent inflation and potentially further interest rate hikes. Unsurprisingly, energy stocks were the only bright spot benefiting from those higher oil prices. So even that couldn't offset the broader decline. Finland stood out as an exception, boosted by a big deal between a utility company, Fortum, and Google regarding AI infrastructure. Fortum shares rose by about 16%. Okay, so the geopolitical situation is clearly still casting a long shadow, but how did that translate into movements in the bond market? Because we saw some pretty significant shifts there too, didn't we? Precisely. Rising oil prices acted as a catalyst for a sharp climb in Eurozone government yields. Germany's 10-year bond yield jumped to levels not seen since 2011, reaching around 3.44% this

2:07morning. And France saw its 10-year yield jumped to an 18-year high, partially driven by concerns around in their fiscal outlook. The market is essentially pricing in a very hawkish stance from the ECB. In fact, it's fully priced in a 25-base point hike today, bringing the deposit rate to 2.50, and another 25-base point is highly anticipated before year end. Okay, speaking of the ECB today, what are economists' consensus expectations? While the market is leaning towards the hike today, as I said, but there are a number of economists believing or rather hoping this might be the final move in the current tightening cycle, while inflation remains a concern, particularly with energy prices climbing, there are emerging signals that underlying inflationary pressures are starting to ease. We'll be closely watching the ECB's communication for guidance on the forward trajectory after the decision this afternoon. Okay, so moving across the Atlantic, the US wasn't

3:08immune to the gloom either. Was it stocks finished lower for a third consecutive session? What was driving the weakness stateside? Well, similar themes to Europe, honestly. Geopolitical risks coupled with rising bond yields, the 10-year treasury yield hit its highest level since November 2023, fueled by a disappointing announcement for the Treasury's buy-up operation today. Some traders felt that the 6 billion US dollars offered wasn't sufficient to quell concerns about rising rates. By the way, President Trump's promise to pay every adult in the US $5,000 if the GOP managed to hold both houses in the mid-term there was no factor for the markets. And the apples product launch didn't seem to offer much support either, with shares finishing marginally lower. All right, then, so turning to Asia overnight, how did markets react to the global headwinds? Asia followed suit, experiencing declines, mirroring the negativity seen in the US and Europe. Overall, markets are down with Hong Kong and Australia underperforming, both down by more than

4:121%. However, there was a slight improvement toward the end of the session with both US and European futures showing modest gains. The focus remains squarely on the upcoming economic data releases. Which brings us neatly to the data calendar. Aside from the ECB rate decisions, we've got US PPI numbers today along with a slew of other indicators. And tomorrow, of course, the big one at US CPI, how crucial those figures are going to be? Extremely crucial. The August producer price index today, and especially the consumer price index tomorrow will be pivotal with energy prices having risen recently. There's a possibility of an upside-surprise in CPI, according to some analysts that could certainly bolster the case for a Fed rate hike next week. However, it's not a four-con conclusion. On the lying inflation is showing signs of cooling and the labour market isn't screaming overheating. Even if the Fed does hike, it's unlikely to signal the start of a prolonged death-at-wing cycle. Okay, and finally, why don't we quickly touch on some individual company news?

5:16Oracle and Adobe are reporting earnings today. Water investors focusing on. Yes, both companies are expected to show solid revenue growth that, driven by demand for their cloud computing services and AI integration. For Oracle, the spot that will be on the capital expenditure plan as heavy investment in AI starts impacting cash flow. For Adobe, it's about maintaining momentum with their AI-powered products. These earnings reports will provide valuable insights into the health of the tech sector and the ongoing AI revolution. So, watch out for that. That's it from me. Thank you very much for such a comprehensive market, round up today, Roman. Thank you very much, Bernadette. Now, to dig a little deeper into global bond markets, I'm delighted to welcome Afonso Borges to the show. Good morning, Afonso. Good morning, Bernadette. Thanks for having me. So, I mentioned those treasury announcements yesterday earlier. What did we learn from them? Yeah, you mentioned it in some detail already up front, but to give you more details,

6:18back in August, treasury announced that they would at least double the size of the long-end buyback operations. So, as a reminder, these used to be two billion per operation. When they said they would at least double, the market assumed that four billion would be the new floor. Yes, it was the date that we were anticipating because it's when we would learn how much they would actually decide to buy and the number came out around six billion and they also gave some guidance to future operations over the rest of the quarter. Now, we have to remember that the four billion was seen as the floor for disenausement. So, the number at six was not particularly surprising. And Mark, it seemed to be somewhat disappointed. So, perhaps you could explain the reaction and the reasons for it. Yes, so, six billion did not turn out to be sufficient to push long-end yields lower. I think the reasons for that is that it was quite close to the floor that I mentioned before at four billion. A lot of people had assumed the numbers close to eight to ten billion

7:21presumably. And we look at the market reaction, not just in interest rates, so long-end yields rose roughly four basis points on the announcement, other measures of long-end term premium also rose, but across some of the trades that had done very well on the August 19th announcement, you think about dollar debasement, weaker dollar trades, long gold type of trades, all of those went slightly in reverse as a function of yesterday's announcement being somewhat disappointing. And given that we're focused on Europe today with the ECB meeting, we should take a look at European bomb markets too. There's been a lot of political developments recently, namely German local elections over the weekend, but we've actually been paying more attention to developments in France, I think. What's the thinking on French government bonds ahead of budget negotiations and, of course, next year's presidential elections? Yeah, that's right. While the the German elections took a lot of attention earlier in the week, we think that the French political calendar is actually behavior in the near term, given fiscal negotiations, but also

8:25presidential elections next year. And there, I think it's important for us to remind our listeners that French government bonds and French risk more broadly already reflect quite a lot of fiscal deterioration. So one way for us to think about that is that when we look at spreads, the different European sovereigns, they on top of the German curve, which is seen as the most the safest one. Today, French government bonds already trade wide to Italy. So they already French way to pay the larger premium to issue debt than Italy does. And that's striking because when you consider the credit rating of France, it's quite a bit stronger than that of Italy, which is rated as a triple B on average. So we don't think this is the time to necessarily turn very optimistic and fade the political calendar risk, but we will just acknowledge that there is already quite a bit of fiscal deterioration, fiscal concerns priced in in French risk. Okay, interesting. We'll

9:31have to keep an eye on that. Thanks very much for the insights, Afonso, and making time to join us today. Thank you. I hope you enjoyed the show today, and I hope you'll join us again tomorrow when Lucia Tuchullovich is going to be your host, because she's going to be talking to our chief economist, David Cole, about the outcome of today's ECB meeting and his thoughts ahead of those all-important US inflation numbers tomorrow. So if you haven't already subscribed to the show, please do so now so you don't miss out. All that's left for me to say is thanks to Roman and Afonso for joining me this morning, and of course to you for listening. Good luck today and goodbye for now. The information and opinions expressed in this podcast constitute marketing material, and are not the result of independent financial or investment research. Please refer to www.dueliersbarr.com forward slash legal forward slash podcasts prefer the other important legal information.