ISM Manufacturing PMI ahead

European equities are under heavy pressure this morning, with the DAX down around 1% as risk sentiment sours. This follows a two-week period of weakness in European stocks, as traders grow increasingly cautious that September could once again bring profit taking and selling pressure. Investors are finding little reason to chase stocks higher when bond markets continue to promote the need for caution. Notably, we have seen continued gains for long-term yields, with the gap between Euro 2-year yields and the 30-year rising to the highest level since the beginning of 2019. In part this reflects the view that while the short-term risks appear to be fading, the consistent rise in borrowing and debt means that many countries are on an unsustainable path that make long-term debt unattractive. The upcoming vote of no confidence in France highlights the problems faced by many nations in the West, with any efforts to try and reduce the debt burden ultimately facing a push back against any rise in taxes or spending cuts.

The UK has similarly seen borrowing costs surge higher, with the 30-year gilt yield rising to the highest level since 1998. Once again, Rachel Reeves finds herself under pressure to come up with solutions that raise funds without driving down growth expectations. With markets already expecting a raft of tax hikes, we find ourselves in a position where the fears around those policy adjustments start to drive anti-growth behaviour by those potentially affected. The weakness seen in the pound does help reflect the perception that the Bank of England might need to step in with additional rate cuts, although the elevated inflation rate highlights that such a move might also raise questions around the long-term stability of the UK economy.

The latest eurozone inflation release saw headline CPI tick higher, rising to 2.1% after a month reading of 0.2% for August. Energy prices continue to provide the main drag on headline inflation in the region, with the -0.6% rate for August taking the annual figure to -1.9%. On the flip-side, services inflation represents the main driver of higher prices, with the annual rate of 3.1% proving influential given the fact that services accounts for roughly 45% of the overall inflation metric.

Later today, the ISM manufacturing PMI in the US could dictate the afternoon tone. The market is braced for another sub-50 reading, although things are worse than they seem given the fact that the reading of 48 is propped up by the 64.8 prices paid element. The fact that we continue to see weakness across the employment (43.4) and new orders (47.1) metrics does highlight the cause for concern as we head into a period dominated by jobs data.