World shares, euro slide as energy shock, fiscal worries bite

Oct 7 : Global stocks and the euro pulled back on Wednesday as oil prices rose above $100 amid renewed Middle East tensions while concerns France's fiscal woes could affect broader debt markets continued to weigh on overall sentiment.

The S&P 500 slid 0.6 per cent, a day after it hit a new record. The tech-heavy Nasdaq fell 0.85 per cent, also pulling back from a fresh all-time high.

MSCI's main world stocks index fell 0.9 per cent, while Europe's STOXX 600 was down 1.1 per cent, near its lowest level since June.

“In the very early stages of the fourth quarter, typically the best quarter of the year for equity returns, markets are being driven by a confusing ‘stocks up, US breadth down, yields up, oil down and up, and down...’ narrative,” said Jeremy Batstone-Carr, an economist at Raymond James. 

Brent crude rose 1.65 per cent to $102.24 per barrel as the market weighed supply constraints from a storm heading for US oil-producing regions and attacks by Yemen's Iran-backed Houthis on Saudi Arabia. US crude increased 1.34 per cent to $90.64 a barrel.

Aneeka Gupta, director of research at WisdomTree, credited still "really strong" earnings expectations for the stock market's relative resilience in the face of rallying oil prices.

"That's what's really holding up the market so far," Gupta said.

The French yield spread against safe-haven German Bunds — a market gauge of the risk premium investors demand to hold French debt — was about 11 basis points (bps) wider after narrowing for two days. It was last at 140 bps, and reached almost 160 bps last week.

French bonds have been under pressure as expectations of higher European Central Bank rates and political uncertainty before the 2027 election raise doubts over France's ability to fix its finances.

"Clearly the market is punishing France on its level of debt," WisdomTree's Gupta said.

EURO DOWN ON RATE DIVERGENCE, FISCAL CONCERNS

The rekindling of investor concerns weighed on the euro, which slipped 0.7 per cent to $1.118. It slid to a 17-month low against the dollar at $1.1161 earlier this week.

Wider yield spreads in the euro area weigh on the single currency by boosting expectations of ECB monetary easing, reviving worries about fiscal sustainability and stoking fears of increasing fragmentation in the euro area.

Markets also closely watched the rate divergence between the US and the euro area as they priced in a more hawkish Federal Reserve after the mid-September policy meeting.

"The interest rate spread between Germany and the US became more negative, which provided support to the US dollar against the euro," Georgette Boele, senior currency and oil strategist at ABN AMRO, said.

"We continue to believe that financial markets are pricing in too many rate increases by the Fed and the ECB," she said.

US TREASURY AUCTIONS, FED MINUTES IN FOCUS

Market participants will closely watch a 10-year Treasury bond auction later in the day and a 30-year auction on Thursday, which will show the depth of investor demand for US debt, analysts said.

US longer-dated yields hit a 24-year high on Monday amid a persistent selloff since late August due to concerns over inflation and the fiscal outlook.

The dollar index, which measures its performance against a basket of currencies, rose about 0.5 per cent, following a 0.27 per cent slide in the prior session. 

The Federal Reserve on Wednesday will publish the minutes of its September 15 to 16 policy meeting, which will be scrutinised for clues about potential rate moves over the next few months.

Traders cut the odds of a Fed rate hike in October to 19 per cent from about 50 per cent a week earlier.