Eurozone rates can hold their ground, even when equities go down
Euro rates have been remarkably resilient against the jitters in equity markets, with the NASDAQ only yesterday displaying its largest intraday swing since Liberation Day. And the low correlation between the two markets could continue. Equities have been driven strongly by the AI thrill, whereas rates are looking more at the underlying macro picture. In the eurozone, the signs point to an improving macro environment, while the foresight of more fiscal stimulus helps reduce the tail risk of falling back into a recession. This more positive outlook helped the 10Y swap rate climb 10bp at a time when the STOXX index sold off 5% in the lead up to the Nvidia earnings announcement. In fact, the correlation between equities and Bunds over the past three months is slightly positive. And with the VIX still elevated, we could very well see more equity volatility.
This also means that euro rates may not be the best hedge against a global equity sell-off. A risk-off event on the back of disappointing AI numbers may push down rates in the immediate aftermath, but it's unlikely to impact the structural macro outlook. The eurozone economy does not hinge on the success of AI to continue its recovering growth path. Unless financial stability concerns arise, an equity bear market is therefore also unlikely to force more European Central Bank cuts. And compared to the US, eurozone households are simply less exposed to swings in equity prices
Friday's events and market view
The eurozone will release the flash PMIs for November, where the consensus is looking for marginal changes only. As such, this would support a picture of slow but still resilient growth. We will also see the negotiated wages growth indicator for the third quarter, which is expected to cool to 2.45% from the previously reported 3.98%. Today also sees a high-profile slate of ECB speakers, including ECB President Christine Lagarde, Luis de Guindos, Joachim Nagel, Martin Kocher and Madis Müller.
Over in the US, we will also get the S&P PMIs, although they carry less weight here than the corresponding ISM counterparts. The University of Michigan will release the final consumer survey results for November, which also showed a very pessimistic outlook on the jobs market previously. One point of focus will remain on Fed speakers, given that key data releases will have to wait for a bit longer, with some coming only after the next FOMC meeting. There is no issuance today, but after the market close on Friday, attention will turn to possible sovereign rating action. Moody’s is scheduled to review Italy, which it currently rates Baa3/Positive, making it the lowest rating by two notches among the three major rating agenc
