Investor sentiment declined in the euro zone amid lower expectations of interest rate cuts

Investor morale declined in the euro zone this October, with lower expectations for lowering interest rates, which raised doubts about the possibility of economic improvement, according to the Sentix survey, issued on Monday.

The Sentix index for the euro zone fell to 2.7 points in October, from 5.1 points last September, compared to analysts’ expectations of 5.0 points.

This comes after the index recorded its highest level in more than four years in September, according to Reuters.

According to “Sentix”, investors’ assessment of the current conditions remained stable, while the decline in the index was attributed to a “noticeable setback” in investors’ expectations.

The current situation assessment index stabilized at -3.3 points in October, while economic expectations fell by a full 5 points on a monthly basis to 8.8 points.

The Sentix survey confirmed that “in Germany, by contrast, hopes for an emerging economic improvement still exist, but here we also see a decline in expectations that should not be ignored.”

In Germany, the main Sentix index fell to -3.6 points, from -2.8 points, while the expectations index fell to 8.0 points, from 12.3 points in the previous month.

On the other hand, the index assessing the current situation in Germany rose for the fourth month in a row, recording its highest level since May 2023 at -14.5 points.

The survey included 1,030 investors, including 218 institutional investors, and was conducted during the period from October 1 to 3.

Euro zone bond yields varied again on Monday, although the movements were less severe compared to the end of last week, in light of investors’ appetite for safe traditional assets, such as German bonds, at the expense of the bonds of the most indebted countries, amid escalating concerns about inflation and financial conditions.

The 10-year German bond yield fell by about 2.3 basis points to 3.4322 percent, and the 10-year Dutch bond yield fell by approximately the same amount, according to Reuters.

In contrast, the Italian 10-year bond yield rose 1.1 basis points to 4.6335 percent, while the French 10-year bond yield increased by about 1.8 basis points to 4.8832 percent. France and Italy are among the most indebted countries in the eurozone.

French government bonds are under strong pressure in light of rising debt levels and increasing political risks ahead of the presidential elections scheduled for 2027. This decline in bond prices comes in addition to broader concerns about rising energy prices, accelerating inflation, and rising interest rates, factors that have weighed on bond markets in recent weeks.

The French 10-year bond yield approached 5 percent last week, a level it has not exceeded since the early 2000s. The difference between the French 10-year bond yield and its German counterpart, which is considered a safe haven, rose to more than 158 basis points on Friday, its highest level since late 2011, before falling to about 145 basis points.

These moves raised concerns about the severity of the bond selling, and also prompted questions about whether the European Central Bank might need to intervene.

Short-term bond yields, which are more affected by interest rate expectations, declined in general, although the severity of the decline varied between countries.

The German two-year bond yield fell 5.3 basis points to 2.9964 percent, while the French two-year bond yield fell 3.3 basis points to 3.6816 percent, and the Italian two-year bond yield fell slightly to 3.5182 percent.

Last week, financial markets lowered their expectations for interest rates, and are no longer fully pricing in the possibility of the European Central Bank raising interest rates again this year. Markets are currently pricing in a 22 percent chance that the European Central Bank will raise interest rates at its next meeting in October.

In Spain, Prime Minister Pedro Sanchez called, on Monday, for early elections to be held on November 29; In an attempt to strengthen his political mandate, after a divided parliament last week rejected key government decrees on housing, amid widespread protests.

The Spanish 10-year government bond yield was largely stable, falling by about one basis point to 4.0799 percent.

Hong Kong stocks fell slightly during trading on Monday, amid limited trading volumes, after losses in real estate companies and major financial institutions overshadowed the gains achieved by technology and semiconductor stocks.

The standard "Hang Seng" index fell 0.08 percent by mid-session, while the "Hang Seng Chinese Enterprises Index" stabilized with little change. The poor performance came in light of the continued closure of financial markets in mainland China on the occasion of the National Day holiday, which extends from the first to the seventh of October (October), with trading to resume on the eighth of this month.

Sectors sensitive to interest rates were subjected to more pressure, as shares of real estate companies fell 0.9 percent, while a sub-index that includes major banks and insurance companies fell 0.7 percent.

On the other hand, the Hang Seng Technology Index rose 0.3 percent, supported by semiconductor and printed circuit board companies. Kingboard Laminates shares jumped 9 percent, while Hua Hong Grace Semiconductor shares rose 4 percent.

Investors are awaiting travel data and retail sales during the “Golden Week” holiday, searching for early indicators of strong consumer demand as the Chinese economy enters the final quarter of the year.

Citi analysts said that activity during the holiday appears “below expectations” based on preliminary data, suggesting a decline in retail and tourism spending per traveler despite the stability of visitor numbers.

In a remarkable move, Budweiser Brewing Company ABAC shares fell 2.1 percent to 5.555 Hong Kong dollars, the lowest level since its listing in September 2019.

The company said that it expects to record an exceptional tax cost of $52 million, as a result of a restructuring process that includes some of its units in mainland China, with the aim of improving capital efficiency.