Fra Danske Bank:

In focus today

• In the euro area, we receive the final inflation print for September. We expect the data to confirm the flash release of headline inflation at 2.2% y/y and core at 2.3% y/y so the print should not be a market mover.
• In Sweden, unemployment figures will be published this morning. We expect unemployment to remain largely unchanged at 8.8% (SA). Although the momentum in the labour market is improving, stronger employment in PMI, and an increase in new vacancies from SPES, it is unlikely to be enough to already reflect improvements in the LFS unemployment rate.
• In the early hours of Monday, China will release its monthly batch of data for retail sales, housing, etc., as well as GDP data for Q3. GDP growth is expected to slow from the 5.3% rate in the first half to 4.7% in Q3. The monthly data will likely indicate that the domestic economy remains weak, with housing and private consumption continuing to struggle.

What happened yesterday

In France, premier Lecornu survived the two no-confidence votes in parliament. A total of 271 MPs voted in favour of bringing down the government which was as expected and showed that a handful of Socialists went against the party line as they previously stated they would. This gives some temporary stability in French politics, and the parliament can now work on the 2026 budget. While this is positive in the short term, we eventually expect problems to return as the suspension of the pension reform makes the medium-term fiscal sustainability worse.

In the US, shares of regional banks faced sharp declines following disclosures of problem loans at Zions Bancorp and Western Alliance Bancorp, both of which reported losses tied to alleged fraud involving loans to funds investing in distressed commercial mortgages. Zions dropped 13%, while Western Alliance fell 11%, raising fresh concerns over the stability of the sector. These developments have highlighted investor nervousness despite the S&P 500 Index remaining near record highs.

In geopolitics, following a two-hour phone call with Russian President Putin, President Trump announced plans to meet Putin in Budapest within ‘the next two weeks or so’ to negotiate an end to the war in Ukraine. Meanwhile, Ukrainian President Zelenskyj is set to meet Trump in Washington today to request additional military support, including long-range missiles. While the White House had recently signalled support for Ukraine, Trump’s conciliatory remarks after his call with Putin have raised doubts about the US’s next steps.

In commodities, gold reached a record high of USD 4,378 per ounce before retreating slightly, while silver also hit a new peak, topping at USD 54.5. The flight to safety amid renewed US regional banking sector concerns has driven strong demand, with gold set for a weekly gain of 7.6%, the largest since early 2020.

In the UK, the monthly August GDP growth came in at 0.1% as expected. Thus, the less than impressive growth picture continues in the UK. Chancellor Rachel Reeves is facing a GBP20-30bn shortfall in the public budget and a strong rationale to build an additional fiscal buffer on top of that, following years of uncertainty surrounding taxation and spending policies. The Labour Party has promised to freeze income tax rates, National Insurance contributions (social security) and VAT, the three biggest sources of revenue. Most alternative measures, such as reforming property taxation, would prove highly challenging or place significant strain on economic growth. Regardless of the approach, there is a compelling case for addressing the fiscal challenge now, while the next election is still years away. Reeves has acknowledged that she is looking at potential tax increases and spending cuts, and it is hard to see how the fiscal gap can be resolved without breaking some promises. There is no way around an unpopular decision, and we think the Labour government will prioritise addressing the budgetary shortfall in the 26 November budget rather than risk larger tax increases later.

In Norway, Q3 manufacturing confidence dropped from +0.4 to -0.3, pointing to negative growth in the manufacturing sector for the first time in almost 2 years. Details to the weak side as new orders dropped from 48.8 to 47.5 and employment from 54.0 to 53.2. Looking at sectors, the producers of capital goods, a proxy for oil-related sectors, have now turned negative which fits well with our view that oil investments are about to turn into a headwind for the economy. Producers of intermediate goods, a proxy for the export industries, are expecting a very moderate upswing. 

Equities: Equities were mixed on Thursday, with Europe faring well (Stoxx 600 up 0.7%) while US markets retreated, ending near session lows (S&P 500 -0.6%, small-cap Russell 2000 -2.1%). Financials were the main drag on US markets, weighing particularly on US small caps after renewed concerns over regional bank credit quality. Additionally, underwhelming earnings from insurance companies added to the sector’s weakness. The result was a broad risk-off session, with nearly all sectors ending lower. Risk aversion appears to be carrying into Friday, as US futures roughly 0.5% lower pre-market.

Diving deeper, Zions Bancorporation disclosed a 50 million charge-off tied to defaulted commercial loans, reigniting concerns about the health of regional bank balance sheets. This adds to a growing list of developments that have unsettled investors, following two subprime auto lender Tricolor and major auto parts supplier First Brands bankruptcies in September. Shares of Zions and Western Alliance both tumbled more than 10% on the news.

FI and FX: US Treasury bond yields declined on the back of problems with two US regional banks which has been hit by bad loans. France sold some EUR 13bn in nominal bonds and linkers yesterday with a decent bid-to-cover. Hence, there seems to be no problem in selling OATs and linkers at the auctions, which was also seen last year when the political crisis began after European parliament elections.