Global Economy
European Markets Mixed Amid Bond Turmoil and Euro Weakness as Fed Rate Hike Bets Fade
European stock markets are poised for a mixed opening as investors grapple with heightened bond market volatility, especially in France where the OAT-Bund spread has widened to 2012 highs. The euro remains under pressure from a stronger dollar and regional political uncertainties. Meanwhile, weaker-than-expected US jobs data has significantly reduced expectations for a Federal Reserve rate hike in October, though a December increase is still priced in. Traders also monitor Middle East tensions, energy prices, and upcoming eurozone PMI data.
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European Bourses Set for Mixed Start as Bond Market Jitters Intensify
Major European stock indexes are expected to open in scattered order on Monday, with investors focused on escalating turbulence in sovereign bond markets—particularly acute in France—while monitoring a struggling euro and recalibrating interest-rate forecasts after a softer-than-expected U.S. jobs report.
Index Futures Signal Divergent Open
- CAC 40 (Paris): indicated down 0.11%
- DAX (Frankfurt): futures up 0.07%
- FTSE 100 (London): futures up 0.31%
- Stoxx 600: futures up 0.19%
Bond Yields Surge on Inflation Fears and Fiscal Concerns
Markets are returning from a week marked by a fresh climb in global sovereign yields, driven by inflation worries linked to Middle East tensions and doubts about the fiscal health of major economies. However, Friday's U.S. employment data has prompted a partial reassessment.
The September payrolls report showed job creation below forecasts, with July and August figures revised lower. Markets now see the prospect of another Federal Reserve rate hike this month as virtually extinguished.
"The labor market is broadly stable, but Friday's downward revisions indicate the U.S. economy lost jobs in two of the nine months since the start of the year, and the risk of further job losses means the Fed cannot raise rates by another 100 basis points from current levels, as the yield curve anticipates," says Jose Torres, economist at Interactive Brokers.
According to the CME FedWatch tool, the probability of a rate hike this month has dropped below 20%, down from 64% a week ago. Traders still lean toward a hike in December.
French Fiscal Uncertainty Widens OAT-Bund Spread
In France, where an uncertain 2027 budget outlook adds to concerns, the yield spread between the 10-year OAT and the German Bund hovers around 140 basis points—a peak not seen since 2012.
Euro Under Multi-Faceted Pressure
The single currency, already weakened by a stronger dollar amid rising rates, is suffering from these uncertainties as investors assess contagion risks to other euro-area asset markets.
"These concerns about the euro's outlook add to those linked to low European gas stocks, already high energy prices, persistent competition from China, the weakening German chancellor, and the risk of hybrid attacks from Russia," notes Jane Foley, analyst at Rabobank.
Key Events Ahead
- Final eurozone private-sector PMI data due later in the session
- Ongoing monitoring of Middle East developments
- Brazilian presidential election first-round results (right-wing senator Flavio Bolsonaro leads)
Source: Reuters