French bonds under pressure; tech selloff pauses

French bonds under pressure; tech selloff pauses
(Cash-market closes are for Thursday, 22 October, US Eastern time; futures and European market data are as of approximately 16:30 Hong Kong time on 23 October.)

On Thursday, the S&P 500 fell 1.22% to 7662.54, the Nasdaq fell 2.60% to 26008.86, and the Dow rose 0.02% to 52867.98. The equal-weight S&P ETF (RSP) bucked the trend, rising 0.73% (Wallstreetcn). During Friday's European session, equity index futures were mixed: Dow futures fell about 0.3%, S&P 500 futures were little changed, and Nasdaq 100 futures rose about 0.2% (Wallstreetcn, Futures data); the 10-year US Treasury yield rebounded 2 basis points to 4.97% (Wallstreetcn); Brent rose 1% to 114.35 dollars and WTI rose 0.9% to 100.32 dollars (Wallstreetcn); spot gold traded near 4020 dollars after briefly falling below 4000 dollars intraday (Wallstreetcn); the dollar index was near 101.6 after falling 0.17% to close at 101.608 on Thursday (Wallstreetcn); EUR/USD was 1.1210 and USD/JPY was 156.9 (Market data).

Market theme
Friday's market was marked by a “pause in the panic, but doubts remain.” Thursday's selloff, triggered by Meta-style “bill shock,” was followed on Friday by two sets of new information. First, Reuters examined Anthropic's roughly 518 billion dollars in infrastructure commitments: about four-fifths are non-cancellable and must be paid whether used or not, extending the question of “who pays for AI” from listed companies' income statements to the balance sheets of private unicorns (Reuters, as reported by NeoTeo). Second, the spread between French and German 10-year government bonds surged to 175 basis points, its highest since the euro debt crisis at the end of 2011; Moody's is due to review France's Aa3 rating after the European close tonight (Wallstreetcn). On the positive side, the tech selloff paused: memory stocks rose broadly in US premarket trading, SK Hynix gained 5.5%, and the 10-year Treasury yield edged up from 4.95% to 4.97% as extreme risk aversion receded (Wallstreetcn). On the negative side, oil rose above 114 dollars and has gained for three consecutive weeks, while France's October composite PMI fell back into contraction at 48.4. The combination of a “growth scare and energy inflation” left the rebound without buyers willing to chase prices higher. Nomura's Charlie McElligott said the market was “repricing in real time” the probability of a US growth scare from an AI reset, and Treasuries were again serving as a hedge (Reuters, republished); JPMorgan cautioned that the Treasury rally reflected the combined impact of the European sovereign bond storm and the Nasdaq's sharp fall, rather than improving US fundamentals (Wallstreetcn). Tonight's US flash PMI at 21:45 and final University of Michigan consumer sentiment reading at 22:00 will be the first data to test the strength of the “growth scare.”

I. AI news: The bill keeps growing, and unicorns cannot escape it either

• Reuters on Friday examined the terms of Anthropic's computing commitments: of roughly 518 billion dollars in infrastructure commitments, about 80% are non-cancellable or payable whether used or not. Google Cloud payments can cover a spending shortfall, while AWS also has similar “pay whether used or not” terms. Microsoft's payment period runs from November 2026 to May 2033. A separate Nvidia capacity agreement related to xAI is worth up to 84.5 billion dollars through 2029, but most of it can be cancelled with 90 days' notice. Including 150 billion dollars under discussion, the potential total is about 750 billion dollars (Reuters, as reported by NeoTeo). These figures take the debate over “who can afford to pay” from Meta's earnings call to a unicorn on the eve of an IPO.
• Bloomberg reported that Anthropic is also negotiating a 45 billion-dollar computing purchase agreement with Nvidia-backed computing provider Nscale to secure capacity ahead of a listing (Bloomberg, as reported).
• The bulls also weighed in: Blackstone president Jon Gray told Bloomberg Television that he did not believe AI was in a bubble and that current AI demand was growing “nearly parabolically” (Wallstreetcn). But Wolf von Rotberg of Bank J Safra Sarasin argued that equities may only truly stabilise when US hyperscalers can demonstrate that soaring AI revenue can support the current scale of construction; increasingly clear signs of stress have emerged in credit markets, and the market's willingness to finance additional capital expenditure is declining (Wallstreetcn).
• Memory stocks rebounded unevenly in premarket trading: SK Hynix rose 5.5%, SanDisk gained 2.8%, Micron rose 2.62%, and Western Digital fell about 3% after reporting first fiscal-quarter results (Wallstreetcn). In South Korea, SK Hynix closed up 4.41%, helping the Kospi gain 0.3% (Wallstreetcn).
• Goldman Sachs trading desk data showed its AI basket index had fallen 23% from its June peak. Its high-beta momentum basket had erased its year-to-date gain and fallen 13.65% for the month, its deepest monthly drawdown since tracking began (Wallstreetcn).

II. Bonds, the dollar and commodities: Treasuries rallied because of France, not improving US fundamentals

• The 10-year US Treasury yield fell 15–19 basis points on Thursday to close at 4.95%, its biggest one-day drop since the regional banking crisis in March 2023. Yields across maturities fell 15–21 basis points on the day (Wallstreetcn, Reuters Morning Bid, republished). During Friday's European session, the yield edged up 2 basis points to 4.97%, while selling pressure on French government bonds also eased (Wallstreetcn).
• JPMorgan said in a Thursday report that the “flight-to-safety frenzy” was jointly triggered by the European sovereign bond storm and the Nasdaq's sharp fall, not improving US fundamentals. Over the past month, the rolling correlation between Treasury yields and the Nasdaq 100 rose markedly, while yields were negatively correlated with Brent crude prices: tech stocks have become the dominant variable for Treasury yields (Wallstreetcn).
• A counterintuitive detail on the demand side: end-user demand accounted for 90.6% and 90.1% of the 10-year and 30-year Treasury auctions respectively, both record highs. Foreign participation in the mid-September auction was also among the highest on record, while August TIC data showed foreign investors buying long-term Treasuries at their fastest net pace in more than a year. Amid the clamour over “de-dollarisation,” foreign investors still treat long-dated Treasuries as the ultimate safe haven (Wallstreetcn).
• Technical picture: the 10-year yield has reached the key resistance zone of 4.94%–5.02%. JPMorgan recommends against shorting against the trend until risk assets clearly stabilise and advises maintaining a 10s/30s curve-steepening position (Wallstreetcn). Goldman Sachs estimates that, if prices move sideways, trend-following funds will net buy about 18.7 billion dollars of bond futures over the coming week (Wallstreetcn).
• Rate expectations also softened: federal funds futures at one point rose 22 ticks, one rate hike next year was largely priced out, and a December hike was no longer fully priced in, with its implied probability falling to 85% (Reuters Morning Bid, republished, Reuters, republished). However, Thursday's initial jobless claims fell to 194 thousand, their lowest since July, indicating that the labour market has not yet weakened (Reuters, republished).
• Dollar and commodities: the dollar index fell 0.17% to close at 101.608 on Thursday, while the yen was among the day's strongest currencies (Wallstreetcn); on Friday, EUR/USD was near 1.1210 and USD/JPY near 156.9 (Market data). Spot gold was near 4020 dollars after briefly falling below 4000 dollars intraday, and was on course for its worst week since June (Wallstreetcn). Brent rose 1% to 114.35 dollars and WTI gained 0.9% to 100.32 dollars; Brent rose for a third consecutive week and reached its highest since early May (Wallstreetcn). The Wall Street Journal's Friday headline was “Oil Prices Rise as Middle East Risks Linger” (WSJ).

III. Stock and sector moves, including earnings: Hedge funds hit on both sides; defensive stocks rise without active buying

• Goldman Sachs trader Matthew Kaplan called Thursday “an anomalous day worth recording”: 335 S&P 500 constituents, or roughly two-thirds, closed higher, yet the index fell sharply. It was the largest gap between market breadth and index performance since the 90s; 155 constituents saw unusual moves exceeding 2 standard deviations (Wallstreetcn). Goldman Prime data showed hedge fund long-short indicator basket GSTHVIPP fell 4.2% in a day, its largest daily decline since the US lost its AAA rating in August 2011, taking its monthly loss to 10.4%. Fundamental long-short, systematic and multi-strategy funds all lost money: short leverage was near a five-year high and long positions were concentrated in AI, so both legs were hit when the selloff came (Wallstreetcn).
• Defensive stocks rose with “no active buying”: Goldman Sachs trading desk order flow was net selling overall, with the buy-sell balance skewed 9.6% towards selling. Kaplan described it as showing “zero signs of offense”: the defensive-sector gains reflected previously very light positioning more than fresh enthusiasm (Wallstreetcn). The day's leaders Allegion (+11%), Roper (+9.7%), General Mills (+8%) and Procter & Gamble (+5.6%) were all defensive stocks (Wallstreetcn).
• European trading: the Stoxx 600 fell 0.13% to 636.50 and was expected to end the week lower. At the open, the Eurostoxx fell 0.3%, the DAX 0.5%, the CAC 40 0.6% and the FTSE 0.2% (Devdiscourse/Reuters, InvestingLive). Luxury group Kering slumped 10.4% after third-quarter sales at flagship brand Gucci fell, disappointing recovery hopes; Switzerland's Holcim rose 5.2% after third-quarter sales and profit beat expectations and it raised full-year guidance (Devdiscourse/Reuters). France's preliminary October composite PMI fell from 51.1 to 48.4, returning to contraction as both manufacturing and services weakened (InvestingLive).
• Earnings: American Express (AXP) and SLB will report third-quarter results before the US market opens tonight; the market expects AXP earnings per share of about 4.49 dollars (Earnings calendar, Reuters). Western Digital fell about 3% in premarket trading after its first fiscal-quarter results (Wallstreetcn).
• Asia close: the Nikkei fell 0.34% to 62693.16, while the Kospi rose 0.3% to 5550.3. Regional Asian stock indices erased intraday losses of as much as 1.1% (Wallstreetcn).

IV. Europe: French spread reaches 175 basis points, highest since 2011; Moody's review tonight

• The spread between French and German 10-year government bonds widened 16 basis points on Thursday to 175 basis points, its highest since the peak of the euro debt crisis at the end of 2011. The French 10-year yield was around 5.07%–5.14%, its highest since 2002 (Wallstreetcn, Dow Jones, republished by Morningstar). The French-Italian spread widened 11 basis points to 127 basis points, and Belgium's spread exceeded 104 basis points, its widest since 2013 (Wallstreetcn).
• Moody's will announce the outcome of its review of France's Aa3 rating, which has a negative outlook, after the European close tonight. Its rating is currently one notch above S&P's, and a downgrade could trigger passive reductions by some institutional investors (Wallstreetcn, FXStreet).
• The situation on the streets also escalated: the French government deployed the military to the streets for the first time to help control protests, 75% of police were mobilised, and armoured vehicles were in place. Macron's approval rating fell to a record low of 15%; only union-organised marches were authorised this weekend, with “Act Two” protests and the 5 November general strike approaching (Wallstreetcn). Kering's CFO said on the earnings call that the company was “highly vigilant” about the risk of unrest over the coming days, while Carrefour warned that social unrest would weigh on this year's earnings (Wallstreetcn).
• Deutsche Bank noted that weaker risk appetite was accompanied by a new wave of doubts about the durability of AI-driven growth (Deutsche Bank view, as reported by FXStreet).

V. Forward calendar (Hong Kong time)

• 23 October (Friday), tonight: 19:00 American Express (AXP) and SLB premarket earnings; 21:45 US October S&P Global flash PMI (WSJ survey forecasts manufacturing at 55.3 and services at 58.0); 22:00 final University of Michigan consumer sentiment (forecast 46.3); Moody's review of France's sovereign rating after the European close (WSJ Data Week Ahead, as reported by Morningstar, Wallstreetcn).
• October 24–25 (weekend): France's “Act Two” protests; museums including the Louvre in Paris close on Saturday; French general strike on 5 November (Wallstreetcn).
• 26 October (Monday): Verizon (VZ) before the open; Cadence (CDNS) after the close.
• 27 October (Tuesday): Conference Board consumer confidence at about 22:00; Coca-Cola and Boeing before the open; Visa and Robinhood after the close.
• 28 October (Wednesday): Federal Reserve FOMC decision at 02:00 early on 29 October (the market prices the probability of a hike at about 15%, and a December hike is no longer fully priced in); 09:00 Reserve Bank of New Zealand decision (expected to raise rates to 3.00%); 21:45 Bank of Canada decision; Microsoft, Alphabet and KLA after the close (WSJ Data Week Ahead, as reported by Morningstar, Reuters).
• 29 October (Thursday): 20:30 preliminary US Q3 GDP +9-month PCE; 21:15 European Central Bank rate decision (current deposit rate 2.50%); Eli Lilly and Mastercard before the open; Amazon and Intel after the close.
• 30 October (Friday): Bank of Japan decision (expected to hold at 1.25%); Exxon Mobil and Chevron before the open.