On Friday, government bonds in the euro zone headed towards recording a strong weekly performance, with investors increasing appetite for sovereign assets that provide a relative safe haven, in light of mounting concerns about the ability of companies linked to artificial intelligence to achieve returns commensurate with their huge spending.
Global bonds are heading to record their strongest weekly performance since late May, after sovereign debt yields for the G7 countries declined by an average of 7.7 basis points, reaching 4.265 percent, according to data from the London Stock Exchange Group, according to Reuters.
In this context, German 10-year bond yields, which are considered one of the most prominent safe havens in European asset markets, fell by 8.1 basis points during the week, reaching about 3.405 percent on Friday. In contrast, two-year German bond yields fell by one basis point, to 3.068 percent.
This performance came at a time when stock markets witnessed noticeable turmoil during the week, amid growing concerns about the high cost of capital, especially for the most indebted companies in the artificial intelligence sector.
Although government bonds traditionally play the role of a “shock absorber” during periods of volatility in high-risk asset markets, they were unable to play this role during most of the current year. The sharp rise in energy and food prices, against the backdrop of the war in the Middle East, prompted investors to take into account the possibility of higher borrowing costs, which led to a rise in bond yields.
In an indication of the change in the relationship between assets, the correlation between German bonds and the European Stoxx 600 index turned positive this week, for the first time since early August. This indicates the return of the inverse relationship between stock prices and bond yields. Returns tend to fall when stocks decline, and rise when they rise.
According to data from the London Stock Exchange Group, this correlation reached its lowest level, that is, the maximum level of negative correlation, in late September.
Concerns about the long-term sustainability of public finances of governments in advanced economies remain one of the most prominent factors weighing on bond markets.
In France, the yield on government bonds reached about 4.81 percent, after they were among the most affected bonds during the past few weeks, amid growing concerns about the country’s ability to address its financial imbalances. Although the yield rose by two basis points during Friday trading, it recorded a decline of 7.4 basis points over the course of the week, the largest weekly decline since early August.
As for the difference between the French 10-year bond yield and its German counterpart, which reflects the additional return that investors demand in exchange for bearing the risks of lending to France compared to Germany, it reached about 139 basis points on Friday, declining from its highest level in 15 years, amounting to about 160 basis points, recorded on October 2.
Markets are awaiting the statements of European Central officials
In reference to the fluctuations witnessed by bond markets in recent weeks, Joachim Nagel, President of the German Central Bank, “Bundesbank”, said on Friday in Bangkok that the recent turmoil reflects a combination of high inflation, resilient economic growth, and the increasing needs of companies working in the field of artificial intelligence for capital.
European Central Bank President Christine Lagarde, Board of Governors member Boris Vujčić, and Piero Cipollone, a member of the bank's Executive Board, are scheduled to deliver statements during events held in Bangkok during the next 24 hours. Analysts believe that these statements may contribute to clarifying expectations regarding the next step of the Central Bank in terms of interest rates.
Hauke Siemsen, a strategist at Commerzbank, said: “The statements of European Central Bank officials are still present on the agenda, in conjunction with the continuation of the annual meetings of the International Monetary Fund and the World Bank in Bangkok. “It is expected that Lagarde, Vujciech and Cipollone’s comments will receive particular attention with regard to near-term interest rate expectations, especially with markets growing more confident in the possibility of a 25 basis point rate hike in December.”
Financial market data indicate that traders do not expect the European Central Bank to raise interest rates during its meeting this month, but they are nearly 100 percent likely to raise them in December, with expectations of at least one additional increase by next April.
In a separate context, four people familiar with the discussions of the World Economic Forum told Reuters that the forum may appoint Lagarde as its president as soon as next month, in a move that could pave the way for her leaving her position at the head of the European Central Bank before the end of her scheduled term.
For his part, Kevin Warsh, a member of the US Federal Reserve Board of Governors, who also participated in the Bangkok meetings this week, expressed on Friday his optimism about the strength of the US economy, without providing indications about the possible path of monetary policy.
Chinese stocks recovered, on Friday, from their lowest levels in 14 months, supported by artificial intelligence-related company announcements about plans to buy back their shares and strong profit expectations, while the yuan headed for gains for the third week in a row, benefiting from strong exports despite continued pressure on the local economy.
The CSI 300 index of leading stocks rose by 0.1 percent, the Shanghai Composite Index rose by 0.2 percent, while the Hang Seng Index in Hong Kong advanced by 0.5 percent.
Despite the recovery, the CSI 300 index ended the week down by 3.4 percent, recording the worst weekly performance since mid-July, and completing a series of losses that lasted 10 weeks.
The improvement came in conjunction with the recovery of global markets, after artificial intelligence stocks were subjected to a sharp selling wave on Thursday, as a result of concerns about high borrowing costs and huge spending on technological infrastructure.
The recovery in US stocks supported the markets of Japan, South Korea and China, with concerns temporarily subsiding about the valuations of technology companies.
In the Chinese market, at least 10 companies linked to the artificial intelligence supply chain announced plans to buy back shares or increase holdings, including eOptolink, which specializes in optical communications devices, and Biotech, a manufacturer of chip equipment.
Technology companies, including MetaX Integrated Circuits and Haigon Information Technology, also revealed expectations indicating strong growth in third-quarter profits.
These announcements helped calm investors, as share buybacks reflect companies' confidence in their prospects, while earnings expectations provide indications of continued demand for some technological products.
But Morgan Stanley warned that market sentiment is still weak due to global liquidity pressures and the slowdown in domestic demand, indicating that limited investment flows restrict the opportunities for indices to rise.
Speculation increased about government intervention to support the market, after trading volumes rose towards the end of the session in exchange-traded funds favored by state-backed institutions, known as the “National Team.”
Bloomberg also reported that regulators encouraged companies and government funds to buy shares, while directing some investors to limit sales.
Real estate and defense stocks led the Chinese market's gains, rising more than 3 percent, while biotechnology and real estate stocks recorded gains in Hong Kong.
In the currency market, the yuan settled near 6.6907 to the dollar during late morning trading, after touching 6.6897 to the dollar, which is the strongest level since January 2023.
The People's Bank of China set the daily reference rate at 6.7220 yuan per dollar, the strongest level since February 2023.
The Chinese currency is heading to record gains for the third week in a row, supported by continued strength in exports, despite the slowdown in some components of the local economy.
Nanhua Futures said that the strength of exports provides essential support for the yuan, while the governor of the Chinese Central Bank indicated that global economic imbalances cannot be addressed by adjusting exchange rates alone.
This position reflects Beijing's keenness to avoid a rapid appreciation of the currency that might affect the competitiveness of exports.
In the United States, data showed that producer prices rose during September at the fastest pace in four and a half years, but Nomura considered that the numbers were not sufficient to justify raising the US interest rate in October.
Markets are awaiting Federal Reserve Chairman Kevin Warsh's statements regarding monetary policy, in addition to Chinese GDP data scheduled for release on Monday.
A Reuters poll showed expectations that Chinese growth would accelerate slightly to 4.4 percent during the third quarter, compared to its lowest levels in more than 3 years.
In contrast, the International Monetary Fund called on Beijing to expand fiscal stimulus to confront weak demand and the risks of price deflation.
Pantheon Macroeconomics analysts believe that Chinese exports continue to make progress despite high customs duties, international trade pressures, high prices, and the strength of the yuan.
While technology gains and stock buyback plans give markets a chance to recover, the sustainability of the gains will depend on improved domestic demand and clarity in US monetary policy.
As for the yuan, it benefits from the strength of the export sector, but it remains linked to the ability of the Chinese economy to achieve more balanced growth between external demand and domestic consumption.
Japanese stocks rebounded on Friday, supported by the recovery of technology companies related to artificial intelligence, with the Nikkei index ending a series of losses that continued for six consecutive sessions, while government bond yields rose with a decline in demand for safe havens, amid continued caution regarding corporate results and the US midterm elections.
The Nikkei index closed 1.39 percent higher at 65,324.29 points, after losses of nearly 5 percent in the previous session, but it ended the week down 5.37 percent.
The broader Topix index also rose by 1.67 percent to 4,066 points, while its weekly losses amounted to 0.95 percent.
Daisuke Hashizumi, chief strategist at Daiwa Securities, said that the rise came as a result of buying back shares after their sharp decline, and not because of new positive factors.
He added that investors do not find strong justifications to increase their purchases before the release of corporate results and the US elections next month.
Markets are monitoring the possibility that the election results will affect the plans of US President Donald Trump, including a proposal to disburse five thousand dollars to American adults and increase military spending.
Technology stocks led the recovery, with Tokyo Electron, which specializes in chip manufacturing equipment, rising by 2.56 percent, and Kioxia, a memory chip maker, rising by 3.84 percent.
SoftBank Group shares also advanced by 1.9 percent, while Advantest shares compensated for their early losses to close up by 0.55 percent.
The recovery came after a global wave of selling in artificial intelligence shares, sparked by concerns about the debts of the American cloud computing company CoreWave, and increasing questions about the companies’ ability to achieve returns that cover their huge investments in the sector.
The shares of the consulting company "Pay Current" recorded the largest relative gains on the "Nikkei" index, with a jump of 17.25 percent, after it announced plans to use excess liquidity in investments and buy back shares. The banking sector contributed to supporting the market, with shares of Mitsubishi UFJ Financial rising by 1.82 percent, and Mizuho Financial rising by 1.72 percent.
The gains included 83 percent of shares traded on the main market of the Tokyo Stock Exchange, compared to a decline of 14 percent and stability of about 2 percent.
In the bond market, the ten-year Japanese government bond yield rose by 1.5 basis points to 2.935 percent, after falling during the session to 2.885 percent. Yields fell on Thursday to their lowest levels in more than a month, as investors flocked to government bonds to escape the turmoil in the stock markets.
Katsutoshi Inadomi, chief strategist at Sumitomo Mitsui Trust Asset Management, said that the wave of risk aversion in the previous session was exaggerated, but it has begun to subside. He added that the rise in US Treasury bond yields during Asian trading encouraged investors to sell some Japanese bonds.
The two-year bond yield rose by 1.5 basis points to 1.92 percent, while the twenty-year bond yield rose by 3 basis points to 3.815 percent. The decline in bond prices and the rise in their yields reflect a relative improvement in risk appetite, with investors returning to stocks after severe losses. But continued concerns about financing artificial intelligence projects, coupled with anticipation of corporate results and US political developments, limit the chances of a rapid recovery.
While the Nikkei succeeded in stopping its series of losses, its significant weekly decline indicates the continued fragility of sentiment, which makes business results and the direction of global markets decisive factors in determining the course of Japanese stocks during the coming period.
