A new neutral rate, much like a decades-old one

A look at the day ahead in European and global markets from Wayne Cole.

It’s been a bit of a random walk in Asia so far, with oil and yields up, stocks mixed, gold down ​and the dollar flat. Oddly, European share futures are firmer, while Asia and Wall Street futures have eased.

Brent has climbed around 2% after ‌President Donald Trump rejected Iran’s latest proposal ‌to reopen the Strait of Hormuz, which seems to be a repeat of its previous demands.

Analysts, at least publicly, continue to assume both sides are seeking an off-ramp. Yet, Trump has repeatedly said the war will linger past ​the midterms and Tehran must be hoping the Republicans will lose control of one or both houses, piling pressure on the White House to end the conflict.

Reports more oil and refined products are getting out of the Gulf could also be encouraging Trump to hang on. Ship tracker ​Kpler estimates crude exports from key Middle East producers rebounded in September to 12.8 million barrels per day, the highest since the war started.

The lack of a truce, and the ​fading hope of one anytime soon, has seen Brent close above $100 for three weeks straight, leaving it up 17% ​for September so far. A dearth of refining also means diesel is at record highs, with the crack spread around $75 compared to the historical average of $15.

All of which makes it increasingly hard for central banks to “look through” the energy shock, a major reason Australia’s central bank is expected to hike rates to a 15-year high on Tuesday.

At the same time, the AI boom and hot PMIs have seen forecasts for economic growth revised up for Asia, Europe and the United States. The Atlanta Fed GDPNow prediction is for third-quarter GDP to run at a racy 5.0%. It will be interesting if the ISM survey this week confirms the strength of the PMIs.

Fund futures have reacted by pricing in a 66% chance the Fed hikes in October and have 90 basis points of total tightening ahead. Notably, markets have priced out any chance of a cut until mid-2028, so it’s no wonder 2-year yields are up 55 basis points this month alone.

The 30-year has climbed 25 basis points in September and most of that is in the term premium, essentially returning bonds to where they were before the 2008 global financial crisis. It’s why central bankers everywhere are talking of a new, higher neutral rate, which seems much like the one from the 1990s.

Key developments that could influence markets on Monday:

Dallas Fed September manufacturing survey

- Fed speakers include Vice Chair for Supervision Michelle Bowman, Governor Lisa Cook, Richmond Fed President Thomas Barkin

- Appearance by ECB President Christine Lagarde, ECB board member Frank Elderson, ECB bank supervisor Pedro Machado

European shares climbed on Monday, supported by a rally in British housebuilders, although gains were capped by a rebound in oil prices and elevated ​bond yields.

The pan-European STOXX 600 was up 0.48% at 641.73 points by 0829 GMT. Most major regional bourses ‌also traded higher.

British housebuilders’ stocks surged ‌after the government said it would confirm a new equity loan programme for first-time buyers in next month’s budget, reviving a policy designed at boosting home ownership and supporting home construction.

Shares of ​Persimmon, Barratt Redrow, Taylor Wimpey, Vistry rose between 13.5% and 15%. Britain’s blue-chip FTSE 100 was up 0.58%.

However, broader market gains were restrained by a 3% jump in Brent crude prices after US President Donald Trump rejected ​an Iranian proposal to reopen the Strait of Hormuz and end the conflict. [O/R]

Shares of European energy companies rose 0.6%, although miners slumped 1.7% as precious ​metals fell on the back of a stronger dollar. [MET/L]

Hochschild Mining, Fresnillo and Endeavour Mining were down ​in the range of 4.8% to 6.3%.

Bond yields remained elevated. The yield on Germany’s 10-year government bond, the benchmark for the euro zone, was last marginally higher at 3.6303%, its highest level since June 2009.

Central banks have responded to oil-driven inflationary pressures with a round of rate hikes, with the European Central Bank raising rates for a second time this year.

“As hawkish Federal Reserve (Fed) - and other central bank - expectations gain ground, this week brings a relatively busy economic calendar, with the focus on the US labour market and inflation, and another important test for the AI trade with Micron earnings,” said Ipek Ozkardeskaya, senior analyst at Swissquote.

As companies begin reporting quarterly earnings next month, investors are likely to demand stronger results to look past the lingering effects of geopolitical tensions.

“They’re still a key driver of long-term momentum in the stock market. The bar has been raised and the tolerance for disappointment is shrinking,” said Daniela Hathorn, a senior market analyst at Capital.com.

Investors will also focus on speeches by ECB President Christine Lagarde and Bank of England Deputy Governor Dave Ramsden later in the day.

Among individual stocks, Danieli plunged 12% after the Italian iron and steel factory equipment maker missed annual earnings estimates.

Italy’s Trevi rose 3.6% to a six-month high ​after construction peer ICOP raised its all-share takeover bid for the firm.