TRACKING THE CORRELATION BETWEEN INTEREST RATES AND EQUITIES

Macroeconomic environment Eurozone : investor confidence, as measured by the Sentix index, weakened by 0.6 to 11.4 in October, down for the second consecutive month. The latest decline was due to the current situation component declining to 33 (from 35), whereas the expectations component improved a touch to -8.3 (from -8.8). Germany : unpleasant surprise, with industrial production declining for third consecutive month in August, down 0.3% mom, missing expectations (consensus: +0.4%). France : BdF survey revealed that business sentiment in the manufacturing industry improved to 105 in September (from 103 in August), in services to 103 (from 102) and in construction to 105 (from 104). As a result, the Q3-18 growth forecasts have been shaded upwards by 0.1pp to +0.5% qoq. Equities Equity markets tended to be weaker as a rule.European equities underperformed for the fourth session in a row (-1.11% for the Stoxx 600), with the tech sector (-2.63%) and energy sector (-1.65%) leading the retreat. Over the last three sessions, the Stoxx 600 has slipped 3.03%. US equity markets rebounded after European closing ( -0,04 % for the S&P 500 , and +0.15% for the DJ ). The VIX broke above 18% intraday. Turning to emerging markets, Brazil’s Ibovespa surged higher (+3.56% at close of trade in Europe) after the conservative candidate came out on top in the first round of the presidential election. Otherwise, China’s CSI 300 fell 4.3%, with the MSCI EM index now at its lowest year-to-date. Bond markets / Derivatives Another risk-off session to the benefit of core sovereigns (US bond markets closed for Columbus Day), with an outperformance by intermediate maturities (5 years). The 10-year BTP-Bund spread broke above 300bp once again. Swap spreads widened by 1bp-2bp. As regards implied volatility, volumes were extremely thin. Money markets / Central banks All short-term contracts (E uribor, short£ and US Libor) recovered on Monday after last week’s trials and tribulations. As a rule, it was back-ends that performed best. The US 3-month Libor-OIS spread continued to narrow, now at just 16.57bp. THE SOFR fixed at 2.18%. The EFFR also at 2.18%, the spread to the IOER still scotched at 2bp. Euro bases continued to creep tighter. FX All G10 currencies weakened against the greenback, save for the Japanese yen and Australian dollar. The best performance came from the yen, the USD/JPY pulling back towards 113, the pair at its lowest since 27 September on account of the bear run on the equity markets. Sterling struggled, losing 0.48%, still affected by Brexit uncertainties. The US dollar’s good performances against G10 currencies stems from the recent upturn in US long interest rates. The US dollar also remains strong against emerging currencies, save the Brazilian real and Argentine peso. The real surged after Jair Bolserano c a me out on top in the first round of the presidential election with 46% of the votes. Commodities Precious metals slumped, with gold set for its sharpest fall since mid-August, due to the strength of the dollar and the surge in US interest rates. Gold is recovering this morning.