Beware the steepening or what's the message?

Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the hosts and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. Hey everyone, it's Friday, 2nd of October, 2026. I'm getting another late start to the podcast here, looking at some geopolitical stuff going on that I wasn't really aware of, except for a couple of headlines, and that is around Ethiopia and Eritrea. This is really intensified here. We have, I think it was Eritrea cutting off all diplomatic relationship with Ethiopia. Egypt is involved to a degree. What is the dispute? I don't want to get into the weeds here, but basically these Tigray separatists want more. autonomy or even to separate, I guess, from Ethiopia. They're in the north, that borders Eritrea. Eritrea likes to support them because of their beef with Ethiopia. Ethiopia wants sovereign access to the Red Sea. It does not have that because when Eritrea separated from Ethiopia back, when was that finalized? In the early 90s, I believe, they took the entire coastline, basically. While it does have sort of practical commercial access through Djibouti, it does not have a sovereign access and there is a key port there along quite close to the Djibouti border in Eritrea. It's a big mess. What could it mean? I don't know, but just reading some of the details here is kind of fascinating. Also, to see this element of drone attacks in Addis Ababa, and I'm just thinking these drones, once again, referring back to that article from a couple of podcasts ago about the Age of Iron and how this might have been why the Bronze Age collapsed, this new technology that, as the article said, democratized violence. And, you know, propagating that back into today and this, you know, the destructiveness of drones, making it difficult to have operationally an offensive force on the battlefield and increasing risk of destruction if you can't field something that shoots these drones down. There's a big new situation going on in Ukraine as well with these faster Russian drones and a higher percentage apparently able to penetrate the air defenses. And I just saw some headline today about a steel-cutting drone. I don't know what that means exactly. I'll have to look into it. But one that was able to take down some kind of electric power, I guess, towers or structures, meaning that significant areas were suddenly rendered without power. Could be a huge risk, of course, going into the cold season, into the winter in Ukraine. And then there was another article headline with Zelensky talking about Russia is prepared to suspend all rules of warfare, whatever that means. Obviously, civilians, you know, civilian. Attacks on civilian infrastructure certainly haven't been off limits so far. So what it could mean worse than that, I'm not entirely sure. But shielding my eyes a little bit. Markets aren't too concerned with all of this, but it is just an interesting sideline. And it's important for Europe, I think, as well, obviously, if Russia is getting the upper hand and important geopolitically. What else do we have? We have a U.S. aircraft carrier headed over, a third one, heading over to the Hormuz Strait area. I'm not sure where it is. What its actual destination is. And importantly, it's carrying 10,000 troops. What are the plans there? So that's an escalation. And at the same time, the U.S. is clearing its last bases, clearing out of its last bases in Iraq. Let's remember that a lot of Iraq is essentially kind of an Iran proxy in many ways. Some of the attacks, I think it wasn't at the East-West pipeline attack in Saudi that was carried out from Iraqi sources. Keep your eyes on this space. Crude oil was back up very sharply yesterday. That's come back in a little bit. Remember when I said we were rolling out of that November contract in Brent when it was trading, what is it, $103 plus or so into a contract that was trading below $98? Well, that below $98 suddenly became the $103 contract yesterday and has now rolled back to $101. It just shows you these positive rolls are just incredible. So, you know, crude oil prices, for those that have just been exposed to the front contract and are rolling into the next one, have seen some spectacular gains this year. Staying on the geopolitical front, a couple of things, one of them being the Brazil election. I knew this back in my mind, oh, it's October this year and suddenly it is October now, of course, and it is this weekend. This is really important geopolitically for the Don Roe Doctrine, the idea that Donald Trump and the Trump administration are bringing about the strategic block across the Americas. They took Venezuela. Cuba is on its last gasp. You know, maybe Nicaragua is holding out or something. And Canada is doing some performative stuff up there and will eventually be knocked into place, one would think. And the last big one being Brazil, a very large country. What is it, 180 million people or 200 million people? I'm forgetting the population. And we have Lula, the incumbent, and center-left candidate running against another Bolsonaro. This one is Flavio. Nice Roman reference there. Flavio Bolsonaro, who is center-right, obviously, and a very important geopolitical figure. And Flavio is a very important geopolitical figure. And Flavio Bolsonaro, who is center-right, obviously, and a very important geopolitical figure. We need to get to something else here, and that is that finally yesterday we're seeing some sense of a climax here and a recognition that this sovereign debt situation is to be taken very seriously. Now, the irony is we're back to risk on because maybe because yields have come down, so that immediate source of concern has now suddenly been wiped away. But there's still plenty of concern and stress out there. If you look at credit spreads, even over in the U.S., if you just look at high-yield credit expanded once again, I think it was up 7%. I think it was up 7%. 318 basis points is that indicator we track. You know, it was only a couple of days above that level back in March. Still, again, the absolute level is still quite low, but there's a directional component here that's moving quite fast in the direction of more stress. And then over in Europe, it's where we have the predominant focus. And yesterday was very unique because we finally saw this huge recognition moment that this is unsustainable, that Germany is a safe haven. So you saw the German two-year, for example, 14 basis points and another handful of basis points this morning, trading all the way back below 3% at one point this morning, the German two-year shats. This is down from 3.35-ish percent at the peak, not that long ago. A huge adjustment. It makes sense. I mean, the ECB is not going to continue hiking at the pace that was already priced in there. We were at three-plus hikes through March of next year. It's crazy stuff to look at if French, and it is France that is the focus, if French long debt continues to spiral out of control and feeds back into the economic risks and the growth outlook for that critical country for Europe. We're back down to more like maybe two or just less than two hikes, a much fairer assessment, but we still would need to crush these French yields, I think, to get a sense that there's any ability to go back to a normalcy. There's a commentator out on Twitter, Dario Perkins, quite well-known of Lombard, I think he said something like, yeah, I don't understand these Eurozone periphery trades or sovereign debt spread trades. We all know that at some point the ECB is going to come in and crush things, and then all these trades will blow up. I'm not really so sure that's the case. I mean, they could weigh in at some point. They could crush things in the short term, but we still have the political cycle to consider, like I've been talking about in recent days on the podcast. And when I say the political cycle, I'm talking about the French presidential election, the drift in the countries. Away from, in the case of France, a commitment to Europe if Le Pen does end up being the victor. And then you have just the dynamics of the debt themselves. This budget proposal yesterday, I haven't dug into it, but the market voting thumbs down on its ability to provide fiscal stability. Too little, too late is the seeming read on that. And this has these spreads blowing wider. When I say spreads, so Germany versus France, the 10-year spread hitting 149%. Today, it's come back a little bit. But this is a huge acceleration. And it's not just Germany, France. Germany, Italy is also aggravating wider. It's lower, but it's still reaching 124 basis points. This one was well below 100 basis points just a handful of days ago. So the stress is still there. And I'll put a link in the podcast episode description to a, let's say, a colorful account on X that is pretty sharp on these things. So pointing out that the dynamics are, it's not just about the government itself and they can tinker. A lot of the framework of how government debt works in France is driven at the department level. So department being the political subdivision within France, of course, established back under Napoleon. And any shortfalls they have, these departments must run neutral, sort of balance their books, basically. So any shortfalls would have to be funded from the federal side. And these government fiscal dynamics are challenged by higher costs, obviously from inflation. At the same time, revenues are challenged by a fall in real estate transactions, because with higher interest rates, it's far more expensive to buy property. Property activity has dropped. And therefore, the department government incomes, it's not going to be as good as it used to be. So it's not going to be as good as it used to be. And it's not going to be as good as it used to be in the past. So it's not going to be as good as it used to be in the past. I haven't double-checked the figures. They're down something like 20, 30% because of a lower transaction volume. So all of this is a risk driving, becoming a self-fulfilling spiral of worsening deficits, unless there's much more dramatic austerity moves made. And France is and 50, 51% for Germany and Italy. Actually lower than that here in Denmark, a bit surprising. Some might think to see that or to hear that. And lower still in a country like Netherlands. So it's not gone away. So sure, the ECB can come in. There's talk of this so-called TPI. This ex-post I've referred to has referred to it as well. Others have too. TPI, what is it? It's one of these ECB acronyms. It's one of these acronyms. It's one of these this one meaning the transmission protection instrument. It was cooked up in, I guess, in 2022 with all of the rate hikes when the focus was on ensuring that there weren't areas of the Eurozone that were seeing excessively tight conditions relative to others as the ECB was in this tightening process, sort of aimed at wanting to iron out any sort of rate spreads or differentials that seemed unfair. But the TPI has a pretty high bar for being used in theory. Of course, everything ends up being political at some point or at some level of pain. And it probably would take little in terms of actual flows to stamp these yield spreads back down. But then you've got moral hazard. You've put the EU's other EU members on the line for this very high French public spending if that's the direction you go. So there's a political cost to doing such a thing. But it's things like the TPI can only be applied if the debt is sustainable, which it is not. And it even explicitly says it cannot be used in cases where there's obvious fiscal imbalances going on that are driving the aggravated widening of spreads. So basically, there's no argument you can make for the TPI, even if it is indeed what they end up using or the excuse they're using or if they invent another acronym, whatever they do. So just I'll put that one out there as well. Now, in terms of the market reaction across besides an actual recession, I think we're seeing a really big reversal in European equities. I think this is premature. It makes sense, of course, to, you know, the immediate relief of the whole yield curve dropping quite heavily, and especially that front end coming in drastically. It does provide relief. But we are still seeing the euro wearing some weakness here. The biggest shock yesterday, especially in terms of the vibe shift, it was in Europe. Make sense. The whole focus from the recent weak Swiss franc was on that carry differential. We got to be short the franc because it yields nothing. And, you know, we can leverage that short up versus other currencies and get paid a very high interest rate, plus the devaluation of the Swiss franc on top of that. But with the market yanking out the rug from under European rates, of course, that eroded the carry. But there's also the whole sovereign safe haven seeking old reflex that maybe is still there from the eurozone sovereign debt. crisis playing a role as well. So we saw, what was it, 94.60 trading before yesterday's big fall in European rates. And we plunged all the way down to something like 93.25. It feels like that's kind of put a cap on Euro-Swiss for now, to say the least, certainly until these French spreads and debt spreads across Europe look very differently. But kind of interesting to see how big or small the Europe reaction or the Euro reaction was across other Euro pairs. So Euro dollar makes perfect sense. It was also lower, punching to new lows for the year, down into, was it 112.15, I think was the low print. Euro sterling was also lower. Interesting to see that UK yields yesterday, they popped up to new cycle and multi-decade highs at the long end of the curve and have come back into the range. So that's a bit of a relief on any kind of worry about UK debt dynamics. And then Euro stocking has been very slow to adjust here. I think a couple of things there. Well, I think it should be lower, Euro stocking, given where yields are headed, because the whole punishment for the Swedish krona has been that low Riksbank policy rate at one and three quarters percent. But when you have a general concern about Europe and European sovereign debt, therefore European growth, that feeds into concerns about the Swedish economy. So it's a bit sort of tugged between two different impulses there. And Euro yen, I would have thought, should trade. Lower. But I guess if the idea is that the whole basis of this concern is around sovereign debt dynamics, Japan has its own set of concerns in that department as well. So it's just not as easy to just reflexively sell Euro yen on European risk like it was in the old days. Still looks a little bit heavy, Euro yen, but it's kind of a reluctant trender, if you will, there. We have the CPI out basically in two minutes or so. We have the CPI out basically in two minutes or so from when I'm speaking now. Maybe I'll get a chance to cover it live if I can find it on my phone while I'm talking here. I'm not sure it really addresses anything relative to the underlying fundamentals and backdrop of what's going on. I haven't even covered the equity session yesterday. I think the most important thing to remark, again, was risk was quite steady to positive. I think the yield drop helping there. But again, is this something to celebrate beyond the very short term? You have this idea of beware of the short term. You have this idea of beware of the steepening. I think I've probably called a couple of podcasts that in the past. The idea that once you've got the rates tightening and tightening and tightening against the economy and against markets, and you're starting to see finally the market price, the central banks to back down, that's usually in the context, though, of the economy being in a recession or something. That's not what we have here. We just have the rates coming down, and that's providing some immediate relief. But how sustainable this is, I'm not sure. I'm not sure. I'm not sure. I'm not sure. I'm not sure I have a feel for that, but certainly the risk on was evidence, the socks was up quite nicely. The broader market was up a little bit. Even Europe has turned around quite strongly this morning, again, on this rate relief. We got Nike down 8% after hours. This company is just going from one bad quarterly report to another. They're taking a deeper cut in terms of the downsizing signal they're sending, plans to downsize, announcing a high single-digit revenue drop for their year-end that will be in May of next year. This quarter saw a worse than 4% drop in overall revenue, 26% drop year-on-year in China, even if North America grew a couple of percent. They're really struggling there to stabilize the situation. Again, another 8%, just staggering the fate of this company, which has dropped now more than 80% from its all-time highs back in, I guess it was late 2021 or 2021. 2022. A very different feel from Accenture, up 16%, I think is the read at least. It was up even more than that at one point. On its results reported yesterday, big AI angle here. It's getting a lot of consulting contracts, I'm sure, as everyone is scrambling to get an AI strategy. To me, it makes a lot of sense. The AI is not yet smart enough to be planning your entire and replacing high-level, high-intelligence, very complicated forecasting and decision-making tasks. These people aren't trusting it as much as they're trusting Accenture to look at these things, apparently. They have customers like Alphabet, that's kind of interesting, and Anthropic and Amazon on their cloud strategy. Those types of customers certainly open your eyes. That whole skepticism into consulting and not really paying dividends for those that have been shorting those names, at least not yesterday in the case of Accenture. Next week, the earnings season picks up a little bit. We'll see what happens. We'll see what happens next week. It's not until the week after we get all the big banks, it kicks off the meat of the earnings season. There's some known names reporting next week. The biggest one next week is Thursday with PepsiCo reporting. I don't know what the angle might be there. Maybe GLP-1 drugs, consumption. Although, on the subject of consumption and AI, there's this super interesting story about McDonald's. I'm putting another link in the podcast episode description to that about their pricing. They're trying to use AI and the micro-location of restaurants relative to what customers might be willing to pay in that specific geography and what the momentum is like in customer traffic and whatever to set the prices in a highly differentiated fashion and even forcing their franchisees to participate in this. It's getting some blowback among customers. There are other fast food competitors that don't do this. It's just an interesting, little story about how does AI play in the real world. This stock, McDonald's, is down 22% this year and over 30% from the highs. A lot of that making sense on the rise in long-term bond yields and somewhat slower growth. I thought that was an interesting story too. Also up today, we have the U.S. jobs report. I'm not so sure this is what the market needs or wants to look at right now. It's more concerned about debt, dynamics. It's more concerned about inflation. It's more concerned about crude oil and what that will mean for all of the above. Nonetheless, it's going to move the market if it's a massive surprise. We're expecting 81K versus a couple of good prints previously, the 127K growth in August, for example. Unemployment rate expected at 4.1% unchanged. Important for that is the participation rate, which unusually actually ticked up in the August read. It's otherwise been falling quite a bit. Some of that on, or a lot of it, on this sort of bulge of aging workers in the U.S., the younger of the boomer generation getting close to retirement and really sitting pretty for those of them that have a portfolio linked to the S&P 500 over the years. Also interesting to note, earnings has really been on a downward slide. Average hourly earnings down to 3.1%. That's what's expected this month too. If the labor market's supposed to be tightening a lot, it seems like you would want to see those earnings picking up at some point too. The ISM manufacturing, by the way, yesterday was not much to write home about. We also saw, by the way, a revision lower of that very strong S&P global PMI. The manufacturing PMI revised down over a point to 55.9. The ISM manufacturing itself was slightly almost unchanged, 54.5. It was expected to be a bit stronger than that. The price is paid, jumping all the way to 77.9 versus 71.1. Those are high readings when you're up in the high 70s, of course, accelerating inflationary pressures is what that is pointing to. And new orders was a bright spot at 55.3. That just about does it for today. There's one more link I'll put in from BBC on about how Amita's muse is about to make the internet a lot more, what did they say, a lot more annoying was the way it was phrased and coming up with some scenarios where it could get us into all kinds of trouble. I suspect that might be the case as well. There can be an awful lot of chaos caused by even 0.5% of its tasks going awry and involving all kinds of customer. Can you imagine the customer queries that spike up because suddenly there's a spike in things that you didn't intend to do and need to unwind by contacting a helpline or otherwise to sort of fix the situation. But looking forward, really curious how the market, reads everything. I've talked about the narrow, narrow advance in the equity market in the US's case with the median stock doing quite poorly. There's some interesting data in yesterday's podcast if you want to give that one a listen and didn't hear it originally. But, you know, I'm just still quite stunned at how well this market is continuing to hold up. How much of this is just this sort of reflexive, in the case of yesterday and right now, where we're seeing futures up and a positive vibe. Is this just a reflexive, hooray, low rates when perhaps the low rates are a sign of the market heading for safe havens? I don't know. But we need to, this needs to resolve. And I don't think the US jobs report is how we're going to resolve this. But if, of course, it comes out massively strong and rates spike back higher, that's, that's maybe not great for the market. I don't know. But I liked Dario Perkins' comment basically, you know, talking about yesterday's long Rosenberg-Gunlach discussion on, you know, set up. And if all this private credit and the whole stock market and everything does face a huge crash or comeuppance or whatever, what have you, does the cycle play out like the classic cycle with, you know, bonds being bid? And the very different opinions from Rosenberg, who's in favor of that versus Gunlach, the bond king, by the way, who says he, we might be in a new structure. Well, a very efficient way to avoid too much listing was the post from, you know, Dario Perkins yesterday that, you know, how he thinks things would play out. He says, and this is just a full quote of the post, at some point in the next 18 months, the Fed is going to hike too much, the AI bubble will burst, and yields are going to plunge. And all these themes about fiscal dominance are going to look rather silly. Always choose incompetence over conspiracy. Pretty, pretty peppy stuff. I'm not sure I 100% agree with him. I know Russell said that, but I'm not sure I'm going to agree with him. And that was the other recent long form conversation about the outlook that would be very at odds with that. But, you know, maybe the Dario Perkins scenario can play out for a couple of quarters until we get the longer term Napier implications of our new era of, you know, geostrategy and the need to continue a massive build out that's going to require a fiscal forcing of the economy, no matter what. So maybe both can be right on different timescales. Who knows? Anyway, I think super interesting market backdrop. Keep that Eurozone sovereign spread situation on your radar. Of course, keep rates on your radar. And let's see how we roll into next week. Have a great weekend when you get there. And I'll be back next week with the next Saxo Market Call. This has been the Saxo Market Call podcast. Thanks for joining today's episode. We're always happy for your feedback and questions of all kinds. To reach out, you can drop us an email at marketcall at saxobank.com. That's marketcall at saxobank.com. Saxo. Serious trading worldwide. So