Introduction: Bond market angst as yields rise
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
There are worrying rumblings in the bond markets, alarming investors and creating headaches for finance ministers including the UK’s Rachel Reeves.
The yields, or interest rates, on sovereign debt from the US, the UK and some eurozone countries has been rising in recent weeks, as bond prices have fallen.
Earlier this week, the yield on US 30-year Treasuries rose to its highest level in over a year, and yesterday the yield on 10-year Treasuries climbed six basis points to 4.69% – spooking Wall Street and prompting stocks to slide.
US Treasuries have been weakening as traders lose faith that central banks will cut interest rates as quickly as hoped. Strong data showing a surprise jump in job vacancies at US companies, and rising price pressures in the services sector, added to those worries on Tuesday.
UK debt has aso fallen out of favour with investors, on fears that economic growth will be weaker than expected.
This has pushed up Britain’s borrowing costs, with the yield on 30-year UK gilts hitting 5.242% on Tuesday, the highest in 27 years, and above the peak reached after Liz Truss’s mini-budget in 2022 sparked turmoil in financial markets, to hit the highest level in 27 years.
That eats into Reeves’s fiscal headroom and could force the chancellor to make fresh cuts to public spending to avoid breaking her own fiscal rules.
It also fuelled expectations that the UK could need more tax raises to finance its debt.
Jim Reid of Deutsche Bank explains:
The problem for the UK government is that with yields where they currently are, they are close to breaching their own fiscal rules and as such may require additional tax rises.
Donald Trump also gave investors a jolt yesterday, with a speech in which he didn’t rule out taking Greenland and the Panama Canal by force.
That may be a taste of the turbulent four years ahead, as Chris Weston, head of research at brokerage Pepperstone, explains:
Trump covered thoughts on Greenland, the Panama Canal, Mexico, Canada, the hostage situation in Gaza, Ukraine and tax and immigration policy. For the neutrals in the market, his views, if he is to be credible on the myriads of hard-hitting polices, further raise the prospect of market players navigating fast-moving, headline-driven markets. And where such an unconventional and hawkish approach is something that will soon lose its shock factor.
Whether Trump’s views impacted markets is unclear, but the totality of the speech won’t have done risk any favours, and the buyers (of risk) simply moved aside, and allowed those exiting long risk (equity etc), amid a pick in short positioning, to move prices lower with increased ease.
The agenda
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7am GMT: German factory orders for November
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10am GMT: Lords Financial Services Regulation Committee hearing with Bank of England’s Sam Woods
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10am GMT: Eurozone consumer and economic confidence data for December
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1.15pm BST: US ADP private payroll data, plus jobless claims at 1.30pm
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1.30pm BST: US weekly jobless claims
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7pm BST: Federal Reserve releases the minutes of its latest FOMC meeting
Key events
UK sells £4.25bn of five-year bonds in biggest auction in a decade
Just in: the UK has successfully sold over £4bn of government debt, despite the jitters in the bond market which drove up borrowing costs yesterday.
Britain’s Debt Management Office sold £4.25bn of five-year bonds, which mature in 2030, at an auction this morning.
The auction, which Bloomberg says is the biggest sale of that maturity in more than a decade, was comfortably over-subscribed.
The DMO received bids worth £12.75bn, three times as much as it wanted to sell, allowing it to cherry-pick the best offers for the debt.
The debt was sold at an average yield, or interest rate, of 4.490%.
That’s slightly higher than the yields on existing UK five-year gilts trading in the markets (which is 4.45% this morning, and peaked at 4.488% late last month).
These five-year bonds are used to price the interest rates charged on fixed-term mortgages, so the pricing is very relevant to the economy.
Another UK Treasury gilt auction this morning – just under 4.5% for 5 year debt, which is much more relevant for eg mortgage pricing…. 3x “covered” healthy demand, albeit at half a percentage point higher than the OBR assumed for 5 year borrowing at the Budget…
— Faisal Islam (@faisalislam) January 8, 2025
Two UK investment trusts have urged their shareholders to resist an attempt by a US hedge fund to take control.
Janus Henderson’s European Smaller Companies Trust, and its Henderson Opportunities Trust, both recommended that investors vote against Saba Capital’s attempt to shake-up their boards and appoint its own directors instead.
James Williams, Chairman of The European Smaller Companies Trust PLC, says:
“The European Smaller Companies Trust is a well-managed investment company whose strategy has delivered long-term outperformance.
“Saba is attempting to take control of your Company by removing a highly qualified, independent board that acts in all shareholders’ interests. It’s clear that Saba’s motives are self-serving. It would like to install directors who would not be independent of the Company’s largest shareholder and has indicated that it may appoint itself as investment manager.
This could endanger shareholder protections, radically alter the Company’s investment risk profile and deny investors the opportunity to benefit from the proven European small cap investment strategy.
Saba, founded by Boaz Weinstein, is gunning for seven London-listed investment trusts in all, arguing that they are delivering poor returns to investors.
My colleague Nils Pratley wrote on Monday that the City should resist:
The cleverness of Weinstein’s campaign is that it has a chance of succeeding – perhaps not at all seven trusts, but maybe at a few. Retail investors are notoriously poor at turning out to vote and not all investment platforms make the process simple. But that is a reason for the City to wake up and make more of a protest about this attempted revolution.
To repeat, not everything is rosy in the world of investment trusts: some funds are undifferentiated and some boards aren’t sufficiently active. But investment trusts as a whole – there are 88 of them in the FTSE 250 index – are definitely worth defending against smash-and-grab merchants. If a New York hedge fund offering only thin promises to close valuation gaps can seize control of seven trusts, then the London stock market is in more trouble than we feared. Vote no to Saba.
Europe’s industry chief has warned the region mustn’t be complacent about the risk of protectionist trade measures by other countries.
Stephane Sejourne told Bloomberg TV that Europe has offensive and defensive tools to defend its industries, including potential tariffs on US imports and financial support to European businesses.
Sejourne, who is Europe’s executive vice president for prosperity and industrial strategy, said:
“Across the globe, markets are increasingly protective, with aid making our industries uncompetitive. This must be addressed.
This marks the end of European complacency.”
The key to getting through 2025 will be “coping with disruption”, says Berenberg bank.
In their global outlook for the year, released this morning, Berenberg says risks for 2025 include the possibility of US interest rate rises if Donald Trump drive up inflation, and the prospect that Russia could win the war against Ukraine.
Here are the key points:
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Happy New Year? Rarely has the outlook for the coming twelve months been as uncertain as it is now and rarely has the outlook depended so much on immediate political choices in the US and, to a lesser but still significant extent, in Europe as well. As a result, the range of potential outcomes for 2025 and beyond is unusually wide.
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Great opportunities: The forces that drove many economies outside Europe to more growth than expected in 2024 and sent equity markets to new highs are still largely in play. Household real incomes are rising on both sides of the Atlantic. Private sector balance sheets are mostly in good health. Labour markets remain resilient. China is adding some stimulus. Inflation has fallen to tolerable levels. Recent monetary easing will support demand in 2025. If incoming US president Donald Trump listens to his better advisors and if Germany, France and the EU get their political acts together somewhat, the world could fare well in 2025. Solid growth in the US, a temporary boost for China, a springtime economic rebound in Europe and an armistice in Ukraine could put the global economy and markets on track for another positive surprise.
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Grave risks: However, if Trump rekindles US inflation with a wave of tariffs and a sharp crackdown on immigration, the US Fed could be forced to shock markets with rate hikes. If insufficient US and European support for Ukraine allows Russia’s Vladimir Putin to de facto win his war, an ensuing blame game and a new wave of refugees could rattle Europe, providing more fodder for pro-Putin and anti-EU political mavericks.
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Hope over fear: On balance, we are modestly optimistic for 2025. On the economic side, we see two feedback loops that could prevent or at least limit major mishaps: i) with inflation at tolerable levels, central banks would have scope to react to an unexpected weakness in demand with additional rate cuts. As one example, China would likely scale up its stimulus sufficiently to stabilise its struggling economy for a while if more policy support is needed; and ii) Trump and some of his super-rich advisors care about the verdict of financial markets. If their actions were to impair the potential for growth and corporate earnings badly enough to trigger a sell-off, they might change tack.
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Asymmetric risks: The key risks for 2025 would affect the US and Europe differently. Big Trump tariffs would show up more in higher inflation than in slower growth in the US, whereas its export-oriented trading partners could suffer a bigger hit to growth. For Europe, most of the key risks to growth (trade wars, weakness in global trade, lack of reforms) would materialise almost immediately. For the US, the damage to trend growth from higher tariffs, less immigration and crony capitalism would take time to show up – but could also be more lasting. On the political side, we hope that Trump will realise that a Putin victory in Ukraine would be a bad start to his new term.
Energy giant Shell has cut its forecast for production of liquefied natural gas (LNG) in the last quarter of 2024.
In a trading update published this morning, Shell predicted it produced between 6.8m and 7.2m metric tonnes of LNG in October-December, down from 7.5m metric tonnes in July-September.
It’s a sign that 2024 ended on a weak note for major energy companies.
Shell also warned that its “trading & optimisation results” are expected to be significantly lower than in Q3 2024, partly due to an expiring hedging contract.
Britain’s FTSE 100 share index has inched higher in early trading, up 15 points (0.2%) at 8260 points.
Banks, whose profits benefit from higher interest rates, are among the risers, while building firms – who benefit from lower borrowing costs – are dropping.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says:
‘Inflation concerns have stoked fresh wariness on the markets, with worries that a pressure cooker of prices increases is heating up again. The FTSE 100 has opened slightly higher but gains are likely to be held back as investors assess data indicating that interest rates may have to stay higher for longer.
Indices in Asia also traded lower after a sharp slide in stocks on Wall Street. Cold buckets of caution have been thrown around as multiple data points indicate that higher inflation is becoming persistent.
Flutter’s profits hit by run of winning favourites
Shares in gambling firm Flutter have dropped in early trading after its profits were hit by a run of winning bets by customers on US sporting events.
Flutter told shareholders that the 2024/2025 NFL season to date has been “the most customer friendly since the launch of online sports betting”, with the highest rate of favorites winning in nearly 20 years.
This run of “very unfavorable US sports results” knocked $260m off Flutter’s profits, on an adjusted EBITDA basis, from November 12 to the end of the year. It had now lowered its revenue and profit guidance for the year.
In the NFL, 77% of favourites won in the fourth quarter of 2024, leading to payouts to customers. It also suffered from games being higher scoring than expected.
Flutter says it lost $74m on the Detroit Lions’ 40-34 win over the San Francisco at the end of 2024.
Flutter shares are down 2.5% in London, and rival Entain have dropped 1.2%.
Britain’s National Energy System Operator has asked electricity generators to make more power available this evening, after spotting that the market could get tight.
NESO has isssued an electricity margin notice for between 4pm and 7pm today, to address a margin shortfall of 1,700 megawatts compared with the amount of power it would like to be available.
In a market notice this morning, NESO says:
“We would like a greater safety cushion (margin) between power demand and available supply.
It does not signal that blackouts are imminent or that there is not enough generation to meet current demand.”
German factory orders drop
Germany’s struggling economy has suffered another blow, with new data this morning showing a drop in manufacturing orders.
German factory orders tumbled by 5.4% month-on-month in November, statistics body Destatis reported, and were 1.7% lower than a year ago.
The fall suggests Germany’s economy may slide into “a light winter recession” says Carsten Brzeski, global head of macro at ING, adding:
In fact, notwithstanding some more technical rebounds, there is still no trend reversal in sight for the German industry. It’s bottoming out at best.
At the same time, disappointing retail sales suggest that the rebound in private consumption in the third quarter is unlikely to continue in the fourth quarter. Unless Christmas shopping brings a positive surprise, private consumption is set to drop, and ongoing political and policy uncertainty combined with re-accelerating inflation make any substantial rebound in consumption unlikely.
China’s currency hits 16-month low on Trump tariff fears
Anxiety that Donald Trump could trigger a trade war once he is reinstalled as US president have hit the Chinese currency today.
The yuan dipped to 7.3316 to the US dollar in trading today, its weakest level since September 2023, and below the daily ‘fix’ set by Beijing which dictates the levels where the yuan can trade.
The currency came under pressure after Donald Trump denied a newspaper report that said his aides were exploring tariff plans that would only cover critical imports.
Trump had previously indicated he could impose tariffs of 60% on Chinese goods into the US, which woud disrupt trade flows.
Wang Tao, chief China economist at UBS, explains:
The yuan is expected to face depreciation pressure, not only from tariff hikes but also from a significantly stronger dollar.
Despite these challenges, we believe the government is determined and capable of managing a relatively moderate depreciation.”
Introduction: Bond market angst as yields rise
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
There are worrying rumblings in the bond markets, alarming investors and creating headaches for finance ministers including the UK’s Rachel Reeves.
The yields, or interest rates, on sovereign debt from the US, the UK and some eurozone countries has been rising in recent weeks, as bond prices have fallen.
Earlier this week, the yield on US 30-year Treasuries rose to its highest level in over a year, and yesterday the yield on 10-year Treasuries climbed six basis points to 4.69% – spooking Wall Street and prompting stocks to slide.
US Treasuries have been weakening as traders lose faith that central banks will cut interest rates as quickly as hoped. Strong data showing a surprise jump in job vacancies at US companies, and rising price pressures in the services sector, added to those worries on Tuesday.
UK debt has aso fallen out of favour with investors, on fears that economic growth will be weaker than expected.
This has pushed up Britain’s borrowing costs, with the yield on 30-year UK gilts hitting 5.242% on Tuesday, the highest in 27 years, and above the peak reached after Liz Truss’s mini-budget in 2022 sparked turmoil in financial markets, to hit the highest level in 27 years.
That eats into Reeves’s fiscal headroom and could force the chancellor to make fresh cuts to public spending to avoid breaking her own fiscal rules.
It also fuelled expectations that the UK could need more tax raises to finance its debt.
Jim Reid of Deutsche Bank explains:
The problem for the UK government is that with yields where they currently are, they are close to breaching their own fiscal rules and as such may require additional tax rises.
Donald Trump also gave investors a jolt yesterday, with a speech in which he didn’t rule out taking Greenland and the Panama Canal by force.
That may be a taste of the turbulent four years ahead, as Chris Weston, head of research at brokerage Pepperstone, explains:
Trump covered thoughts on Greenland, the Panama Canal, Mexico, Canada, the hostage situation in Gaza, Ukraine and tax and immigration policy. For the neutrals in the market, his views, if he is to be credible on the myriads of hard-hitting polices, further raise the prospect of market players navigating fast-moving, headline-driven markets. And where such an unconventional and hawkish approach is something that will soon lose its shock factor.
Whether Trump’s views impacted markets is unclear, but the totality of the speech won’t have done risk any favours, and the buyers (of risk) simply moved aside, and allowed those exiting long risk (equity etc), amid a pick in short positioning, to move prices lower with increased ease.
The agenda
-
7am GMT: German factory orders for November
-
10am GMT: Lords Financial Services Regulation Committee hearing with Bank of England’s Sam Woods
-
10am GMT: Eurozone consumer and economic confidence data for December
-
1.15pm BST: US ADP private payroll data, plus jobless claims at 1.30pm
-
1.30pm BST: US weekly jobless claims
-
7pm BST: Federal Reserve releases the minutes of its latest FOMC meeting
