Morning Bid: Spain to France: hold my cerveza

European Markets React to French Bond Rout, Spanish Snap Election & ECB Policy

Market Overview and Key Drivers

A look at the day ahead in European and global markets from Stella Qiu

Political Uncertainty in the Euro Zone

Just when markets thought Europe's political theatre could not get more crowded with the French fiscal drama, Spanish Prime Minister Pedro Sanchez called a snap election for November. Sanchez is trailing in polls and a defeat would leave markets facing political uncertainty in two of the euro zone's four biggest economies at once.

French Bond Rout and Euro Performance

The French bond rout has at least caught its breath. The premium investors demand to hold French 10-year bonds over safer German debt narrowed to 137 basis points on Monday, but still far wider than the 85 bps a month earlier. The euro, which got clobbered down to $1.1161 overnight, has clawed back above $1.12, but whether that holds is anyone's guess.

ECB Policy Outlook

Potential for a Dovish Shift

Some are betting the bond market turmoil could trigger a dovish shift from the European Central Bank, which has already raised interest rates twice this year, with every move adding to France's swelling interest bill. Yet, with inflation running at 3.8% and Europe bearing the brunt of the latest energy shock, policymakers may have little room to pivot.

Upcoming Economic Data

Euro zone retail sales and construction PMIs land later and could nudge the debate on a year-end rate rise, which is now 83% priced.

Global Bond Market Reactions

US Treasury Yields

Across the Atlantic, US Treasuries did not get much relief, with the 10-year yield hitting a new 24-year high of 5.3493%.

Bond Sell-off and Asset Class Response

Bonds have traded poorly for weeks now and every bounce seems to attract a fresh wave of sellers. It's the kind of sell-off that would, or should, normally rattle every asset class, but bizarrely everything else seems blasé.

The breach of the psychologically dreaded 5% level proved to be a non-event, and now 5.25% to 5.35% is the new pain threshold on the 10-year. Still, Nasdaq closed at a record, Nvidia market cap approached $7 trillion and Asian shares gained modestly. European stock futures are up 0.4%.

Other Market Influences

Earnings Season

Earnings season offers stock bulls something to cling onto. Samsung is due to release its preliminary third-quarter results on Thursday, and its operating profit could top 100 trillion won ($74.5 billion) for the first time ever.

Oil Prices and Middle East Exports

The drop in oil prices, with Brent now near $100 a barrel, may have helped too. Exports from the Middle East have risen as ships run the Strait of Hormuz at night to shuttle oil out. It's a risky business, but with VLCCs able to earn more than $1 million a day, it is clearly worth it for some owners.

Key Events to Watch

Economic Releases and Central Bank Speakers

Key developments that could influence markets on Tuesday:

Euro Zone and UK Data

-- Euro zone retail sales for August

-- Euro zone, Germany and France S&P Construction PMIs

-- The UK S&P Global PMI

Fed Officials' Speeches

-- Fed officials John Williams, Michelle Bowman, Jeffrey Schmid, Lorie Logan speaks

($1 = 1,342.7000 won)

(Editing by Jacqueline Wong)