Safe havens gain as geopolitical and sovereign risks unsettle markets. Risk aversion intensified on Thursday as escalating tensions in the Middle East, surging oil prices, widening French sovereign spreads and renewed weakness in AI-related equities weighed on global sentiment. The JPY and CHF outperformed, while US equities declined, and US Treasury yields fell sharply. However, the EUR remained relatively resilient despite mounting concerns over France's fiscal outlook.
Middle East tensions lift oil and safe-haven currencies. The JPY and CHF reclaimed their traditional safe-haven roles as fears of a broader Middle East conflict intensified. USD/JPY fell 0.9% to 156.77, its lowest close since September 17, while USD/CHF declined 0.5% towards 0.8205. Brent crude surged 4% to USD 113.17 per barrel, raising concerns over another energy-driven inflation shock.
US equities extended their losses amid geopolitical uncertainty and renewed concerns over AI-related valuations clouding the growth outlook. The S&P 500 declined 1.2% to 7,663, while the Nasdaq Composite fell harder by 2.6% to 26,009. The Atlanta Fed’s GDPNow estimate for 3Q26 has fallen to 3.5% from 5% in late September and its August peak of 6.2%. With the outlook steered toward US growth moderation rather than a recession, the USD should decline with US equities and bond yields until global risk aversion generates haven demand.
Geopolitical risks escalated after Iran's Islamic Revolutionary Guard Corps threatened to target US bases in the Middle East if Washington continued encouraging vessels to use what Tehran described as an illegal route through the Strait of Hormuz. The US also ordered the departure of some diplomats and their families from Saudi Arabia amid threats from Houthi militants. The combination of higher energy prices and heightened geopolitical uncertainty has revived concerns over stagflation, complicating the outlook for monetary policy and risk assets.
US Treasuries rallied as investors sought safety amid mounting concerns about economic growth. The 10Y yield declined 16.6 bps to 4.95%, while the 30Y yield fell 12.9 bps to 5.28%. The Fed is widely expected to pause at next week’s FOMC meeting, with markets questioning the scope for further tightening if higher energy prices undermine consumption and weaken growth. The implied probability of a December Fed rate hike slipped below 80% for the first time since October 2.
French sovereign stress intensifies, but EUR remains resilient. French sovereign bonds came under renewed pressure as fiscal concerns pushed the 10Y OAT-Bund spread to 173.86 bps, its widest since November 2011. France's 10Y government bond yield also closed above 5% for the first time since 2002, reflecting growing doubts over the government's ability to restore fiscal credibility amid political uncertainty. Nevertheless,
EUR/USD remained within its week-long 1.1180–1.1260 range. Its relative stability suggests that investors are differentiating between France-specific fiscal risks and a broader Eurozone sovereign debt crisis. Unlike 2012, when markets questioned the integrity of the monetary union, the current widening in spreads has yet to translate into systemic concerns. While French fiscal uncertainty could constrain the currency's upside, a sustained sell-off would likely require evidence of contagion to other sovereign markets, particularly Italy, or a broader reassessment of Eurozone financial stability. Nonetheless, the European Central Bank is expected to hold rates at next week’s meeting, with markets scrutinizing whether the ECB will start to view France’s sell-off moving from justified market repricing towards obstructing monetary policy transmission.
GBP steadies ahead of UK Autumn Budget. GBP/USD held around 1.34 ahead of the October 28 Autumn Budget, recovering from its brief decline to 1.3137 on October 14 following stronger-than-expected UK CPI data. Chancellor John Healey faces the challenge of providing targeted relief to households and businesses struggling with elevated living costs without undermining fiscal credibility. Markets will scrutinise whether the Budget balances near-term affordability measures with credible medium-term fiscal consolidation. GBP’s relative resilience suggests investors remain willing to distinguish the UK's fiscal challenges from France's political and sovereign risks. However, higher borrowing costs leave little room for fiscal slippage, making the government's commitment to its fiscal rules critical to sustaining confidence. GBP is also supported by expectations that the Bank of England will join the global hiking cycle with a 25 bps hike at its November 5 meeting.
Quote of the Day
"Why music? Well, we love music, and it’s always good to do something you love. More importantly, music’s a part of everyone’s life. Everyone. Music’s been around forever. It will always be around.”
Steve Jobs during the unveiling of the IPod
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