Hopes for a de-escalation in the Middle East boosted bond prices

Hopes for a de-escalation in the Middle East boosted bond prices – Review and Outlook

What drove the bond markets last week?

• In the Middle East conflict, the feared military escalation between the U.S. and Iran has not materialized, at least for now. U.S. President Trump is also allaying concerns about renewed U.S. military strikes and raising hopes for a diplomatic rapprochement.
• In the U.S. midterm elections, Trump's Republicans suffered a historic defeat. Starting in January, the Democrats will control both chambers of Congress, and with larger majorities than pre-election polls had predicted.
• The Bank of England raised its base rate for the first time since the summer of 2023 and signaled at least one more rate hike in the upcoming months.
• The latest data from the U.S. labor market came as a pleasant surprise. The ADP report for October shows that the pace of job growth remained unchanged compared with September. The JOLTS data show an increase in job openings and a decline in layoffs.
• The U.S. technology stock exchange NASDAQ experienced its worst price drop since March 2020 amid growing concerns about the AI boom, which is fueling demand for "safe-haven" assets. Doubts are emerging about whether Anthropic will go public anytime soon.
• In the eurozone, inflation accelerated in October to a rate of 4%, the first increase since September 2023. The core rate, however, remained unchanged at 2.5%.
• As expected, the U.S. Treasury does not plan to change the auction volumes for longer-term government securities in the new fiscal quarter. The accompanying medium-term outlook opened the door a bit for an adjustment over the course of the coming year.

What could drive the market next week?

• The financial markets remain in the grip of news from the Middle East, commodity prices, and political developments in France. How sustainable is Donald Trump's latest verbal shift toward easing tensions with Iran?
• Despite the positive surprise from the ADP report, the official U.S. jobs report for October remains a “box of surprises,” based on recent history.
• The U.S. consumer price data for October is the macroeconomic highlight of the week. One notable feature is that year-over-year change rates are not being reported due to last fall's government shutdown.
• The primary market for U.S. Treasuries will have to absorb the next wave of long-term bond issuances next week. Meanwhile, activity in the primary market for euro-denominated government bonds is likely to decline noticeably compared with last week. We expect gross supply of only about 13 billion euros, down from 25 billion euros the previous week. Net cash flows are nevertheless set to turn negative due to a lack of reflows from maturing obligations.

Elmar Völker, Senior Fixed Income Analyst