SIFs Stall Amid New Sanctions

STOCK INDEX FUTURES

Stock index futures slipped, following a bit of a rout yesterday, shaken by a weak batch of earnings and worries over US-China trade negotiations. Tesla shares fell 3.7% in premarket trading after the company’s earnings missed expectations and profits dropped by more than a quarter, despite record vehicle deliveries. IBM tumbled 6.4% with subpar results, while T-Mobile declined 1.5% following an earnings miss, and Union Pacific slipped 0.9% on weaker-than-expected revenue. Despite only a fifth of the S&P 500’s market cap reporting earnings so far, about 85% of those firms who have reported have beaten profit estimates. If the trend continues, it will put the stock market on track for its best performance since 2021.

Elsewhere, the US imposed sanctions on Russia’s major oil producers, Rosneft and Lukoil. Reuters reported that the Trump administration is considering measures to restrict a wide range of software-powered exports to China in retaliation for Beijing’s latest curbs on rare earth exports, though President Trump later confirmed that his meeting with Chinese President Xi Jinping is “scheduled.” Inflation data out Friday for September will be the mainstay of data this week out of the US, given that the shutdown continues to delay the release of economic data. PMI data on US services and manufacturing activity will also be released on Friday. Markets will watch for clues on the labor market and how the shutdown has impacted demand from consumers.

CURRENCY FUTURES

US DOLLAR: The USD index is higher as markets wait for Friday’s delayed CPI data. The Fed is still expected to lower interest rates by 25 bps next week, although the CPI data still remains significant, as it could dampen expectations of an additional cut in December if it proves to be hotter than expected. Inflation is expected to rise 0.4% in September to an annualized rate of 3.1%. Markets will also closely watch Treasury Secretary Scott Bessent’s meeting with his Chinese counterparts in Malaysia as part of ongoing US-China trade negotiations. Wednesday brought a choppy trade to the dollar, where it dipped against its peers driven by a rout in the stock market and concerns over US-China trade tensions. Earlier in the week, President Trump shot down a request by Democratic lawmakers to meet until the shutdown ends. The standoff in Washington continues with no end in sight.

EURO: The euro edged down against the dollar in quiet trade ahead of preliminary PMI data for October from Germany, France, and the eurozone and the US’s October CPI inflation report, all due Friday. The ECB enters its blackout period starting today, ahead of next week’s rate-setting decision. Markets have fully priced in a rate cut by the ECB for its July 2026 meeting. In recent weeks, political developments in France have caused the euro to slide, and markets appear reluctant to fully price out risk from France as budget talks appear fragile. S&P cut France’s sovereign rating to A+ from AA-, citing heightened fiscal risks and continued uncertainty surrounding government finances.

BRITISH POUND: The pound extended losses against the dollar, hitting its lowest level in a week following yesterday’s softer-than-expected inflation reading, fueling speculation of earlier-than-expected interest rate cuts out of the Bank of England. CPI inflation for September held at an annualized rate of 3.8%, showing no changes in September after rising 0.3% in August. The inflation figures came in below the expectations of economists and the Bank of England, who had expected a rise to 4%. Inflation is expected to continue to moderate, offering the BoE a potential reprieve if those expectations are reflected in upcoming data. Investors continue to remain cautious ahead of November’s budget announcement, especially following data released on Tuesday that showed Britain’s borrowing in the first half of the tax year was the highest on record outside of the pandemic. Recent comments from Bank of England Governor Andrew Bailey have also weighed on the Sterling, with Bailey warning that the UK’s economy is operating below potential and that the labor market is showing signs of softening. PMI data on services and manufacturing activity will be out on Friday along with retail sales data.

JAPANESE YEN: The yen fell against the dollar, with the currency heading toward a seven-month low against the dollar as markets await details of a large-scale stimulus package from newly elected Prime Minister Sanae Takaichi. Inflation data out Friday is expected to show that price pressures remain elevated, with consumer prices excluding fresh food expected to rise 2.9% in September. Meanwhile, the Bank of Japan is expected to hold interest rates steady at its meeting next week. New finance minister Satsuki Katayama said on Wednesday that it is necessary for the government and the BoJ to coordinate to make economic and monetary policies effective. Trade figures showed that Japan unexpectedly posted a trade deficit in September as exports grew below expectations while imports rose far above expectations. Exports rose 4.2% on the year, the first increase since April, although below an expected 4.6%, as growth was supported by a weaker yen and a trade deal with the US. Imports rose 3.3% on the year, above an expected rise of 0.6%, reflecting an increase in household spending. Import growth is expected to continue on the back of stronger consumer spending, which could continue to put pressure on prices in Japan as a result.

AUSTRALIAN DOLLAR: The Aussie rose against the dollar. Australia’s third-quarter CPI data is due on October 29 and will be decisive for the Reserve Bank of Australia in whether or not it decides to cut rates at its meeting in November. Recent data showed that unemployment jumped to 4.5% in September, adding pressure on the RBA to lower its official cash rate. Markets will also pay close attention to US-China trade talks, which if go well, could see an increase in risk sentiment and move the Aussie higher, while a lack of progress may offer some headwinds. The Commonwealth Bank of Australia said an extension to the existing deadline of a trade deal was more likely than a comprehensive agreement. Governor Michele Bullock is scheduled to speak on Friday and will be a key focus for markets in a relatively light week on the economic calendar.

INTEREST RATE MARKET FUTURES

Futures fell across the curve in a bear steepener move after rallying for the past week, signaling that markets have already priced in a series of rate cuts out of the Fed. Existing home sales data is due later in the morning and is expected to show 4.06 million new sales. Markets are waiting for Friday’s CPI inflation report, despite already pricing in Fed rate cuts in October and December. Headline inflation is expected to rise 0.4% on the month in September. Fed Funds futures are showing a 99% chance of a cut in October and a 95% chance of another cut in December. On the macro front, the Supreme Court’s ruling on the legality of President Trump’s tariffs, along with trade uncertainty and the government shutdown, has the potential to keep uncertainty high and lead to volatility in yields in early November.

Wednesday was a quiet day for Treasurys aside from the $13 billion 20-year bond auction, which found solid results with a bid-to-cover ratio matching the six-auction average of 2.73. Directs took an above-average share of the auction, bringing home 26.3% vs. a six-auction average of 20.7%. Indirect took home a 63.6% take vs. a six-auction average of 68.0%, leaving dealers with a below-average take of 10%.

The spread between the two- and 10-year yields rose to 51.10 bps from 50.20 bps on Wednesday, while the 2-year yield, which reflects interest rate expectations, rose to 3.467%.

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