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A look at the day ahead in European and global markets

By Wayne Cole, Chief Correspondent, Treasury

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It’s been a cautious start to the week in Asia as markets wait to see when, or whether, Israel will launch a ground invasion of Gaza, and bonds continue their vicious sell-off.

Israel’s military continued to bomb Gaza on Sunday and clashed with Iran-backed Hezbollah on the border with Lebanon.

The leaders of the United States, Canada, France, Germany, Italy and Britain on Sunday underscored their support for Israel and its right to defend itself, but also urged it to adhere to international humanitarian law and protect civilians.

A screen displays that trading is halted for Western Alliance Bancorporation on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 4, 2023. REUTERS/Brendan McDermid

Still, some aid trucks did get through, which was enough progress to prompt a pullback in oil prices.

It failed to impress bond markets, however, as U.S. 10-year yields crept back up to 4.967% having surged almost 30 basis points last week alone.

The market has notably failed to garner any safe-haven bid as investors demand a higher real yield and term premia, stirring speculation the market is pricing in a new normal for rates that is above the Federal Reserve’s pick of 2.5%.

The scale of U.S. borrowing is also likely a concern given Washington last week reported a $1.695 trillion budget deficit for fiscal 2023, fully 23% higher than the prior year and above all pre-pandemic shortfalls.

Yields in Japan were also on the rise after the Nikkei newspaper reported the Bank of Japan as discussing a further tweak to its yield curve control policy, which might be announced at its policy meeting on Oct. 31.

The global rise in borrowing costs has seen the market price out almost any risk of the Fed hiking rates next week, and a near 70% chance it is done tightening altogether.

Markets, likewise, see scant risk the European Central Bank will hike when it meets this week, and is flirting with the chance of rate cuts from April next year.

Higher bond yields are also testing valuations for equities and promise pain for any company that misses the market’s earnings expectations this week.

Mega cap darlings Microsoft, Alphabet, Amazon, and Meta, all report this week, along with Intel, IBM, General Motors and General Electric, among many others.

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