Marketmind: Halloween scare on markets

A look at the day ahead from Saikat Chatterjee.

Some ghoulish pre-Halloween drama this week on global bond markets but it hasn’t really spooked equity markets, which have marched higher even as short-end government bond yields explode — the tech-heavy Nasdaq in particular, hit a new record high on Thursday.

Currency volatility too is close to 2021 lows. One explanation is that the strength of trailing third quarter earnings are propping up stock markets.

That may not wash for much longer though. Results from tech heavyweights Apple and Amazon missed market expectations, pushing their shares lower in after-hours.

That’s weighing on Asian stocks on Friday, putting MSCI’s ex-Japan index on track to snap three weeks of gains. U.S. stock futures are set to open in the red.

Euro zone bond yields are continuing to rise after European Central Bank President Christine Lagarde failed to dissipate bets on end-2022 interest rate hikes. Italian bond yields endured their biggest daily rise in over a year and are rising further on Friday.

Her prediction for inflation to remain below target in the medium-term hasn’t pushed German inflation-linked 10-year bond yield much away from the record low hit on Wednesday.

What it may boil down to is, in the words of Citi strategist Matt King, a “credibility gap” between inflation and real yields, already at its most stretched the 1970s.

This chasm poses a conundrum for policymakers. In Australia for instance, officials seem to have lost control of the yield target which key to the central bank’s stimulus policy. Instead, bonds saw their biggest selloff in decades and markets are howling for rate hikes as soon as April.

Things seem to have calmed a touch as the weekend approaches; the dollar is weaker, Bitcoin advanced 1% and China’s stricken Evergrande has made an interest payment for an offshore bond, making it the second time in a week it narrowly averts default.

Key developments that should provide more direction to markets on Friday:

Daimler AG reported a higher Q3 net profit on despite a 25% cut in production and expects to hit profit targets.

Ether, the world’s second largest cryptocurrency, hit an all-time high above $4,400

Data corner: Preliminary Q3 GDP readings from eurozone, Germany, France, Italy

Corporate earnings; ExxonMobil, Chevron, Natwest Group, BNP Paribas

(For graphic on Aussie bonds – https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnoalopq/Aussie%20bonds.JPG)

(Reporting by Saikat Chatterjee; editing by Sujata Rao)

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