By Geoffrey Smith
Investing.com -- U.S. bond yields hit their highest since before the Great Financial Crisis on fears of higher inflation and further interest rate hikes. U.K. bonds suffer again as public borrowing explodes due to higher interest and benefit costs. Snap falls by a quarter in premarket after posting a dismal outlook for revenue, while Twitter slumps after a report that Elon Musk may have talked his way out of his buyout deal by siding with Russia on the social media site. In Europe, natural gas prices fall nearly 10% after Germany drops its opposition to an EU price cap mechanism. Here's what you need to know in financial markets on Friday, 21st October.
1. Bond yields hit a 15-year high on rate fears
U.S. bond yields hit their highest levels since before the Great Financial Crisis, amid fears of higher inflation and further interest rate hikes from the Federal Reserve.
By 06:15 ET, the benchmark 10-Year Treasury bond yielded 4.28%, just off a 15-year high. It's now risen over a quarter of a point this week alone, as investors have increasingly priced in assumptions that it will take the Fed longer than hoped to bring inflation down. The market now sees Fed rates peaking at 5% next year, while a number of Fed officials have warned against expecting them to come down any time soon.
Fed Governor Lisa Cook warned on Thursday that inflation remained "stubbornly and unacceptably high," hours after a surprise drop in initial jobless claims, which underlined the tightness of the labor market.
New York Fed President John Williams is the Fed speaker du jour at 09:10 ET.
2. U.K. slides into recession
The U.K. economy is sliding quickly into recession, leading to a rapid deterioration in public finances. Retail sales volumes fell for the second straight month in September – the decline perhaps exaggerated a little by the death of Queen Elizabeth II and the subsequent mourning period.
More worrying, however, was the sharp rise in public sector borrowing last month to just under 20 billion pounds. That was caused by a big rise in interest payments on inflation-linked debt and on energy subsidies to households, two things that are likely to be a feature of the next six months.
The figures came after a day of chaos in Westminster, which saw Liz Truss ousted as Prime Minister by her colleagues after only six weeks. Any hopes of a quick return to normality are being constrained by reports that Boris Johnson – who was himself ousted in disgrace earlier this year – is plotting a comeback.
3. Stocks set to open lower as bond market weighs; Snap stumbles
U.S. stock markets are set to open lower later, with sentiment bruised by the relentless rise in bond yields that is raising the cost of capital – and consequently hurting profit margins - for all quoted companies.
By 6:20 ET, Dow Jones futures were down 150 points or 0.5%, while S&P 500 futures were down 0.7%, and Nasdaq 100 futures were down 0.9%. They're on course to end the week slightly higher, albeit still firmly caught in a downward trend that stretches back to January.
Stocks likely to be in focus later include Snap (NYSE:SNAP), which shed a quarter of its value after it said it expects revenue to stagnate in the current quarter as advertisers cut back on spending. The news cast doubt over whether the company can ever turn a profit. Snap stock was trading at its lowest in nearly four years in premarket trading.
Whirlpool (NYSE:WHR) is also in trouble as the bottom falls out of the consumer durables market, while railroad stocks are still bid after beats from CSX (NASDAQ:CSX) and Union Pacific (NYSE:UNP). Verizon (NYSE:VZ), Schlumberger (NYSE:SLB), and American Express (NYSE:AXP) head Friday's earnings roster. European giants L'Oreal (EPA:OREP) and – again – Adidas (OTC:ADDYY) both disappointed overnight.
4. Germany caves in to EU pressure on gas cap
Germany finally caved in to EU pressure for a price cap on natural gas prices this winter. Chancellor Olaf Scholz dropped his opposition to the plans in a marathon 10-hour meeting with other leaders which continues today with discussions on the broader economy and the war in Ukraine.
Berlin had resisted the EU's initial plans to cap wholesale market prices, fearing that that would lead major suppliers to pull out of the market – an unaffordable risk, given that Russia has already imposed a de facto ban on shipments.
Benchmark natural gas prices in Europe fell nearly 10% in response to the news. The cap mechanism now stands a good chance of being finalized at a meeting of Energy Ministers on Tuesday.
5. Twitter slumps amid reports of national security review of Musk buyout
Twitter (NYSE:TWTR) stock fell over 8% in premarket after Bloomberg reported that the Biden administration is considering subjecting Elon Musk's takeover bid to a national security review, after the Tesla (NASDAQ:TSLA) CEO used the platform to air some conspicuously pro-Russian comments in recent weeks.
Musk had argued – in line with the Kremlin's own talking points - that Ukraine should cede Crimea to Russia due to its history as part of the Russian Empire, and had proposed re-running the sham referenda that Moscow had used to justify its annexation of four Ukrainian provinces (none of which is 100% under its control. Eurasia Group pundit Ian Bremmer had said Musk told him he had previously spoken to Putin, although Musk later denied that.
Reports also suggest that Musk is planning to lay off three-quarters of Twitter's workforce if his takeover bid succeeds.