AI Concerns Leave Dollar Vulnerable to Oil Price Falls — Market Talk
1016 GMT - Lingering concerns over debt-funded AI investments have seemingly left the dollar more vulnerable to any falls in oil prices, ING's Francesco Pesole says in a note. Rising concerns about tech stocks have challenged U.S. interest-rate rise bets, providing more flexibility for rate expectations to adjust lower in the case of lower oil prices, he says. The balance of risks have shifted towards a softer dollar, he says. "Even so, we continue to favor a gradual and orderly dollar decline rather than a sharper depreciation." The continued prospect of Federal Reserve tightening and elevated oil prices remain supportive, he says. The DXY dollar index rises 0.1% to 101.791 after hitting a near three-week low of 101.506 Tuesday when oil prices slipped. ([email protected])0959 GMT - The People's Bank of China's potential shift to an overnight policy benchmark could support Chinese government bonds, Julius Baer fixed-income analyst Magdalene Teo says. The overnight repo rate of around 1.25% is below the current seven-day reverse repo rate of 1.4%, suggesting a lower threshold for monetary easing. Lower short-term funding costs could compress term premia and improve banks' carry returns, boosting demand for bonds, she says. The 10-year government bond yield touched 1.625% after the announcement. The yield curve could bull-flatten as investors extend duration into five- to 10-year bonds, Teo says. However, cheaper funding could increase leverage in the financial system, prompting the PBOC to step up risk management, she adds. ([email protected]; @ivy_jiahuihuang)0933 GMT - U.K. underling inflation pressures are gathering pace, strengthening the case for two Bank of England interest-rate increases over the coming months, Sanjay Raja at Deutsche Bank says in a note. Headline CPI inflation rose to 3.5% in September, while core inflation increased to 2.8% and services inflation to 3.7%. "Underlying inflation trends are pushing higher, with all our preferred core services metrics rising in September," Raja says. Food prices and index-linked increases are also likely to keep services inflation elevated into 2027, he says. And although there are few signs of second-round effects so far, continuing conflict in the Middle East could delay the return to lower inflation. "The case for insurance hikes, as we've argued, is gaining momentum," Raja says. ([email protected])0917 GMT - Bitcoin remains caught between improving institutional adoption and persistent macroeconomic pressures, Zaye Capital Markets analyst Naeem Aslam says in a note. Switzerland's financial regulator has approved the country's first retail spot bitcoin exchange-traded fund while J.P. Morgan Asset Management has incorporated bitcoin into its long-term capital market assumptions for the first time, he says. Institutional demand has also improved with bitcoin ETFs recording net inflows. However, Treasury yields and the dollar rise as oil prices jump on Middle East supply disruptions, weighing on bitcoin. Bitcoin's immediate performance remains driven by dollar liquidity, interest-rate expectations, institutional fund flows, and leveraged trading activity, he says. Bitcoin falls 0.1% to $82,727, LSEG data show. ([email protected])0913 GMT - Chinese households are increasingly shifting their wealth into financial products and offshore investments from property and bank deposits in search for for higher returns, according to Moody's Ratings, citing data from asset managers and regulators in China. "This trend is creating growth opportunities for wealth management and cross-border financial services," it says. While tighter regulatory and tax enforcement may slow offshore investment growth in the near term, demand is likely to remain resilient due to the attractive return differentials between offshore and onshore assets, it says. ([email protected])0831 GMT - U.K. government bond yields rise only slightly and by less than their eurozone peers, even after Wednesday's U.K. inflation and public sector borrowing data exceeded expectations. Inflation rose to 3.5% in September. However, there's still little evidence that higher energy prices are spilling into other parts of the inflation basket, ING's James Smith says in a note. The Bank of England is likely to raise interest rates in November and probably February too, he says. "But assuming second-round effects stay contained, we think officials will return to rate cuts by the end of 2027." Meanwhile, public sector borrowing rose to 24.5 billion pounds in September, above forecasts from analysts and the Office for Budget Responsibility. Ten-year gilt yields rise 0.8 basis points to 5.406%, according to Tradeweb.([email protected])0754 GMT - The risk of a rate hike by Taiwan's central bank is increasing, OCBC economist Herbert Wong says in a note. While OCBC's base case is for the Central Bank of the Republic of China to keep rates steady at the December meeting, it thinks there is a growing chance of a 12.5 basis-point hike to 2.125%. "Sticky core and services inflation, strong export demand and elevated monetary growth have strengthened the case for a precautionary adjustment," the economist says. However, a soft property market and an uneven domestic recovery will likely limit the scope for tightening unless inflation broadens further, he adds. ([email protected])0745 GMT - Wednesday's higher-than-expected U.K. inflation data has mixed implications for sterling, Capital.com analyst Daniela Hathorn says in a note. Stronger inflation could provide some support by reinforcing expectations of higher U.K. interest rates, she says. "However, higher inflation is not necessarily positive for the pound if it damages growth prospects or undermines confidence in the U.K.'s fiscal position." Public sector borrowing data also exceeded expectations Wednesday, adding another complication ahead of the October 28 budget, she says. Sterling's direction could depend on whether investors believe the Bank of England can restore price stability without causing a sharp economic slowdown, she says. Sterling trades flat at $1.3377. The euro falls 0.1% to 0.8388 pounds. ([email protected])0733 GMT - China's economy is becoming more reliant on foreign demand while domestic demand continues to struggle, says Nguyen Hoang Nam, China economist at Capital Economics, in a note. Growth picked up in 3Q, but the improvement masks a further weakening in domestic demand, he adds. The detailed breakdown suggests that last quarter's rebound was driven entirely by exports, and even the AI-related boost to growth is becoming increasingly dependent on foreign demand, he says. While rising exports should remain a tailwind in the near term, this growing reliance leaves the Chinese economy vulnerable to rising trade barriers or a reversal in the global AI boom, he says. ([email protected]; @ivy_jiahuihuang)0712 GMT - U.K. inflation should remain above the Bank of England's 2% target for a while, with a November rate rise all but guaranteed, says Thomas Pugh at RSM UK following the latest U.K. inflation data. Inflation rose to 3.5% in September, driven by fuel prices, with higher energy, food and memory chip costs expected to push inflation higher, he says. "We see inflation peaking at 4.5% in early 2027 and doubt it will be back at 2% until 2028." Still, knock-on effects from higher energy prices remain limited. "The [Monetary Policy Committee] will take some comfort that the miss was almost entirely driven by fuel prices and that there is little sign of second round effects so far." Pugh expects another rate rise in 2027. ([email protected])0709 GMT - The dollar recovers as Treasury yields rise and oil prices push higher on worries over supply disruptions due to the Middle East conflict. The dollar is also supported by safe-haven flows and a weaker euro amid ongoing concerns about French debt. On Tuesday, the dollar hit a near three-week low against a basket of currencies following weak U.S. housing data. The dollar's falls also reflected rumors of progress in U.S.-Iran talks, which briefly lowered energy prices, but the move faded overnight, Danske Bank's Jens Naervig Pedersen says in a note. The DXY dollar index rises 0.1% to 101.778 after falling as low as 101.506 Tuesday. ([email protected])0658 GMT - Eurozone government bond yields rise in opening trade, tracking U.S. Treasury yields and higher oil prices. French government bonds, or OATs, underperform German Bunds amid uncertainties around next year's budget, although Belgian OLOs and Italian BTPs are also under pressure. There is no government bond supply in the eurozone on Wednesday. The 10-year Bund yield rises 1.8 basis points to 3.414%, while the 10-year French OAT yield is up 2.9 basis points at 4.948%, according to Tradeweb. ([email protected])