Focus turns to ZEW index and UK labour market

In focus today

In Germany, the ZEW index for October is released, which will give us a hint of the growth assessment ahead of the PMIs on Friday. The assessment of the current situation is expected to rise further to the highest level since early 2023 while expectations are expected to decline.

In the UK, labour market data for August will be released. Consensus expects the unemployment rate to remain unchanged at 4.9%. Wage growth, which remains in focus for the Bank of England, is expected to ease slightly further. The main driver of wage growth is lagged effects from public-sector pay increases.

In Hungary, the central bank will make its rate decision. We expect them to keep interest rates unchanged at 5.50%.

Economic and market news

What happened overnight

In China, The People's Central Bank of China kept the 1-year and 5-year Loan Prime Rates unchanged at 3.00% and 3.50%, respectively. Thus, China kept its key lending rates at record-lows for the 17th straight month. This was in line with our expectations.

What happened yesterday

In the AI-space, rising demand for credit default swaps on AI-linked companies suggests investors are becoming more cautious about the debt-funded AI investment boom. AI-linked debts have sky-rocketed so far this year, with companies raising an estimated USD466bn.  The sharp increase in CDS trading and wider spreads, even for stronger issuers such as Microsoft, indicates growing concern over whether heavy spending on data centres and chips will translate into sufficient free cash flow. While AI remains a key market theme, credit markets are increasingly treating funding risk as an important vulnerability.

In France, the government urges curfew in some areas after a weekend of riots. Violent protests over living costs and education conditions have reinforced investor doubts about the government's capacity to deliver budget consolidation ahead of the presidential election. The 10-year yield rose 0.14 percentage points to 4.93% and the spread to Germany climbed back to 1.47 percentage points. Unless the unrest eases and the government can re-establish credibility on deficit reduction, volatility in France's bond market is likely to remain elevated.

Equities: US equity indices were stronger yesterday, led by the tech, while the less-tech exposed indices had a tougher day. Nasdaq rose 1.1%, while S&P500 rose 0.4% with only 35% of the names higher on the day. European Stoxx600 declined 0.8%. The consumer disc also had a strong day, ending 2.7% higher, however this was virtually only driven by SpaceX and Amazon. The tech-led rally yesterday was essentially a mirror image of last week, with a narrow set of names performing in tech, with the equal-weight index underperforming the market cap. The tech sector managed to rally despite another rise in Treasury yields, suggesting yesterday's move was less about easier financial conditions and more about investors seeing last week's sell-off as too much, with tonight's SpaceX earnings report as the near-term test for the AI-narrative. Overnight, Asian equities are mostly lower, failing to extend the tech rally in US hours yesterday. European futures are lower, while US futures are higher. It is particularly noteworthy again that the S&P500 leads futures higher, with Nasdaq trailing.

FI and FX: The EUR weakened on a broad basis yesterday, where the focus in the FX market remained on French politics and debt as well as high energy prices. Notably, EUR/USD traded close to the 1.12 level, while EUR/NOK fell to a new low of 10.55. Yields rebounded and the yield curve steepened - a bit more in the US than in Germany and the Scandies. The rates market seems to disregard next week's policy decisions from the ECB and the Fed and remained locked in on possible hikes in December.