Renewed doubts about AI spending, triggered by disappointing results from Alphabet, Amazon and Intel, sent tech stocks lower around the world last week and pushed investors into bonds.
Treasuries rallied into month-end, although the risk-off move had little impact on the major currencies. The US Dollar Index finished roughly flat, the euro and sterling were little changed, and the safe-haven Swiss franc picked up only modest gains. Emerging markets took the brunt, with equities falling again and posting their worst month since the start of the Iran war. Falling US yields would normally relieve some pressure on these currencies, but investors are paying more attention to equity outflows driven by risk aversion.
This week promises to be a volatile one, dominated by US politics and the Bank of England rate decision on Thursday. The midterm elections are on Tuesday, though it is likely that the full results will not be known until Wednesday or perhaps even later. Eurozone October flash inflation comes out on Wednesday, and a series of key US labour market reports will be crowned by the payrolls report for October on Friday. Apple and AMD report earnings, giving markets another read on the AI trade.
GBP
Last week’s Autumn Budget announcement was a non-event for sterling and gilts, as the government avoided any dramatic or unexpected moves, and the actual news had been largely priced in. The fiscal headroom was rebuilt to levels seen as just about acceptable for now, tax rises were modest and targeted largely at banks and energy support measures were so small that the growth and inflation implications will be negligible. While markets have taken the budget in stride, the lack of action to tackle welfare spending or clarity on defence spending means that we are left with more questions than answers.
The pound, however, has edged higher against both the dollar and the euro as we head into Thursday’s Bank of England decision. We expect the BoE to raise rates, a move that is almost fully priced in, given resilient growth and stubbornly high inflation. The vote split and the guidance will matter more for the pound than the decision itself. We expect a split vote and open ended guidance that provides no explicit commitment to further rate increases in 2027. Market expectations of three more hikes after this week's meeting strike us as overly aggressive, and we expect the MPC to push back against them.
EUR
The euro was little changed after an eventful week. The ECB held rates after discussing a hike, signalling another increase is coming in December. Policymakers do, however, appear increasingly wary about the sell off in European bonds, and the nod towards the spike in French yields is a clear indication that this could sap the appetite for further hikes next year. French bond spreads, which had touched crisis-type levels, eased after the meeting, but resumed their march higher in the general risk-off mood. The meeting was overshadowed by the news that President Lagarde plans to leave her post in February - nine months ahead of schedule. We don’t expect this to have major implications for the ECB rate path or the euro, though the sooner we hear news of her successor the better as far as the common currency is concerned.
The euro ended the weekly largely flat, reflecting two offsetting forces: concerns about France on the one side, and the selling of US assets driven by the AI wobble on the other. If the AI scare fades, the French problem could dominate again. Flash inflation data on Wednesday is the next test for the ECB’s tightening bias.
USD
For the third week running, the dollar failed to rally on good news or on risk aversion. The Fed held rates, but there were two dissents in favour of a hike and both of the third-quarter GDP and September inflation reports came in hot. Markets now price a 75% chance of a December hike, with no more than one additional rate increase in 2027, showing significant convergence to our views of one and done in December. The line from the Fed that it already sees previous tightening as doing some work adds credence to this view.
Payrolls data on Friday and any political surprises from Tuesday’s midterms are the main risk events this week. With prediction markets pricing a 95% chance of Republicans losing control of at least one house of Congress, it would take a massive polling error for the midterm news to move markets significantly. A Republican sweep remains the main tail risk for the dollar, and we would likely see a rally as investors brace for more tax cuts, greater spending, a wider deficit and renewed fears over Fed independence.
CNY
Chinese equities keep sliding, but the yuan rally has not missed a beat. The currency’s rise has, in fact, accelerated, with USD/CNY falling to a fresh low of about 6.65 last week. China’s fifth plenum focused on strengthening governance and, unsurprisingly, appears to set the stage for Xi’s re-election as General Secretary of the Communist Party at the 2027 Party Congress. That matters politically, but further consolidation of power should matter little for investors.
Instead, economic data should be in focus and the first prints covering the final quarter of the year look soft. Composite PMI from NBS fell from 50.7 to 49.7, returning below the key level of 50, where it has been for three of the last four months. In October, both the manufacturing and services indices showed contractions. This week brings more data in the form of RatingDog PMIs, skewed towards smaller private firms rather than the bigger, state-backed enterprises surveyed by the NBS. There, the trend has been more encouraging with the index keeping above the level 50 and trending higher in recent months, though still at modest levels around the 52 mark. The manufacturing print, already released, showed more of the same as in September, with the index marginally lower at 52, exactly in line with expectations. The yuan does not appear bothered by the data, though it started the week slightly weaker against the dollar, with USD/CNY just above last week’s low.
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