French Yields' 24-Year High, China-EU Car Sales Accelerate, Russia's Oil Giant Struggles

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0:06 News. This is the Bloomberg Daybreak Europe podcast. Good morning. It's Thursday, the 22nd of October. I'm Caroline Hepka in London. Coming up today, markets watch for contagion risk after the spread between French and German bonds hits a 15-year high. Chinese automakers more than double their share of new car sales in Europe as pressure builds on relations with Beijing. Plus, we take a closer look at how drone strikes and sanctions are squeezing Russian oil giant Rosneft. Let's start with a roundup of our top stories. French bond yields could come under further pressure in the coming days as Middle East hostilities push Brent crude prices above $ 110 a barrel.

0:50 On Wednesday, the yield on benchmark French debt hit 5% for the first time since 2002. That came as rising energy prices exacerbated concerns over the country's fiscal outlook. The gap between French and German yields also widened to the most in 15 years. Our bonds reporter Alice Gledhill says that markets are now on alert for contagion risk.

1:15 It's a big story for sure in European bond markets right now. It's what everyone is talking about. We have seen signs of spillover. So there have been some days where the moves in French bonds have been really quite severe and you've seen other European bonds kind of move with France. So particularly Italy, which is another country which has very high debt levels and is just kind of quite sensitive to these kind of moves. And increasingly, we've seen actually the safe asset in Europe, which is German bunds rally on days when France has been selling off.

1:44 Alice Gledhill speaking there. The market pressure comes against a difficult political backdrop after violent cost of living protests last weekend. A deeply divided French parliament is also debating a budget with around 43 billion euros of deficit cutting measures. The latest move high in the price of oil follows deadly attacks against Saudi Arabia. A drone strike on Saudi Arabia's Shaibat field killed two people but left operations unaffected. A separate attack on a key airport killed one person. The U.S.

2:16 State Department has ordered some diplomats and their families to leave the country due to the growing threat from the Houthi militants. Here is Democratic Representative Sidney Kamlager-Dove giving her reaction.

2:29 This is very distressing when you hear that folks in our embassies are being asked to leave.

2:35 I think that's the.

2:35 First sort of alarm that things are spiraling.

2:38 Out of control.

2:40 The number one priority of the State Department should be to ensure the safety of all Americans that are abroad. And I will have to say this is an indication of the lack of leadership there. coming from this White House. The actions coming from Trump, I think, are partly why we see a more destabilized region.

3:02 That was the Democrat Representative Sidney Kamlager-Dove, who sits on the House Foreign Affairs Committee. The latest results from US tech giants Meta and Tesla paint a sharply different picture on AI spending, with Meta boosting its CapEx plans while Tesla cuts back. CEO Mark Zuckerberg told investors that a pricey wage on AI is paying off as third quarter revenue rose 26% beating estimates.

3:32 We are building out the capacity to serve more than a billion people over the next few years. In the near term, MUSE is very compute-intensive to run, but we expect to improve its cost efficiency by more than 10x in the next year, which will enable it to be profitable once the revenue lines are at scale.

3:51 Mark Zuckerberg there speaking after Meta introduced a new class of non-voting stock that could be used to fund the firm's expansion. Meta shares rose by more than 2% in after-hours trading on Wednesday. Whilst Meta plans to supercharge its spending, things are shaping up differently at Tesla. The carmaker is pulling back after investment last quarter trailed expectations, stalling the plans to transform Tesla into an AI and robotics company.

4:21 Tasha Keeney from ARK Invest is still confident the tech will shape the firm's future.

4:27 Most of our forecast is really focused on robo taxis. That is the future of Tesla. So right now, the robo taxi service is really in its early innings. You know, we heard they in the release, they're reaching two million unsupervised miles cumulatively.

4:43 By the way, they did that.

4:45 You know, they reached one million miles, four times faster than Waymo.

4:50 ARK Invest Director of Investment Analysis Tasha Keeney reacting to the news there. Tesla says that capital expenditure will be around $ 20 billion this year compared with a raised target of more than $ 25 billion earlier this year. Chinese auto manufacturers are claiming more of Europe's market share. The number of new cars getting licensed for the road rose by 10% to 1.36 million in September. That's according to the European Automobile Manufacturers Association. But Bloomberg Intelligence says that Chinese automakers probably captured much of that growth and have more than doubled their registrations this year. Germany's Chancellor Friedrich Merz says that Europe is ready to shield its own economy from

5:34 trade imbalances.

5:36 We have to be ready to defend ourselves, to defend our industry. And as far as I can see, we are getting a lot of public support, a lot of support from the industry that they are saying this is overdue, that Germany, France and the entire European Union now come to the point where they are ready to defend their interests.

5:58 And that's what we are doing.

6:00 Merz has grown more hawkish on trade with China in his 17 months as chancellor. The EU-wide shift on China is gaining political traction as job cuts across the automotive industry accelerate. The European Union has reached a provisional agreement to overhaul rules on market securitisation. The framework would allow banks to free up more capital to lend to households, to businesses and infrastructure projects. Once finalised, the reforms would unleash billions of euros to finance key defence and climate finance initiatives. And ahead of UK bank earnings, shares in Britain's biggest banks have been falling as equity analysts expect the government to hike taxes on the industry. Bloomberg's James

6:47 Walcock has more ahead of next week's UK budget.

6:51 What does cutting the cost of business actually mean? It's a slogan the UK government has struggled to define. The expectation is Chancellor John Healey hopes to make life easier for entrepreneurs and small businesses at his coming budget. But he acknowledged in a recent interview that Labour's changes to employment law... and previous tax hikes have put companies under pressure.

7:13 And despite his warm words, many in the City of London expect their costs of doing business may well be higher after the budget next week. In London, James Wilcock, Bloomberg Radio.

7:24 And those are our top stories for you today in the markets. Broad risk off. Eurostoxx 50 futures down 0.8%. NASDAQ futures slumping 1.3%. Disappointing AI-related tech earnings. The main driver, but also the escalating Middle East tensions. Oil prices brent above. $ 111 a barrel now this morning, up by 2%. The All Country World Index also down two-tenths of 1% and a sell-off in Asia. The Kospi lower 3.3%. So, Asia really bearing the brunt of the sell-off. Chinese stocks on the cusp of a bear market, CSI 300. slumping 1.8% this morning. US 10-year treasury yields are down three and a half basis points as you have a rally thanks to haven demand for US treasury. It's 5.08 and we'll continue to track what is happening with French spreads as

8:14 they will begin trading later today. Another story has caught my eye. Do you play an instrument? How about the sax? I'm in a late night jazz kind of a mood. The saxophone is making a comeback amid the return of live musicianship and TikTok memes like saxophones getting louder. Don't ask me. Have a look online. I've had Masego on in the background preparing for the show today. More than 600 million Spotify views of his most popular track, which is really lovely. And I got that recommendation from the clearly very plugged in Mike Jordan, writing for Bloomberg. Saxophones were very big, of course, mid-century, right up until the 1990s.

9:01 Charlie Parker, do I need to say that? John Coltrane, Courtney Pine, even Bill Clinton. 1992 was the year that he sort of shook up that presidential election, playing the sax on US TV. Then a massive drought occurred. And the sax guy became a bit of a cliche and a meme joke, but apparently the instrument is back and it is restyled. It's been building for a little while with Kamasi Washington, for example, an amazing player in the US.

9:28 So yeah, that's the music I've been listening to for a lovely and groovy morning. I'm going to put a link to that story though in our podcast show notes, I think to inspire some of you musicians or musician lovers. Anyway, I just thought it was a lovely story. Right, let's get back to business, though, shall we? French borrowing costs have climbed above 5% for the first time in 24 years, with the government yet to pass a 2027 budget in France and the April presidential election adding uncertainty around already strained government finances. Joining us now is our rates and FX reporter, Alice Gledhill. You heard a little snippet of her earlier in the program. Alice, good to speak to you.

10:09 There wasn't much that was new, though, yesterday. I mean, the budget deficit we know about, the political gridlock, the protests. So why did yields on French benchmark bonds rise so much?

10:22 Yeah, it's a good point, Caroline. I think there were a couple of things going on yesterday. So, the first is that energy prices were higher again. So, we saw quite a big tick higher in terms of oil. We know that Europe's very sensitive to the energy shock story.

10:37 It's inflationary.

10:38 So, we saw sort of weakness across the whole European government bond complex. I think the other thing is just sentiment. Everyone is very wary of kind of stepping in here. Liquidity is quite poor. So, it doesn't really take all that much to push spreads wider.

10:53 Yeah, absolutely. And those spreads, French 10-year OAT yields to German bunds have gone from, what, 104 basis points a month ago to 159 basis points yesterday. Why is that differential so closely watched?

11:10 What does it mean for Europe? Yeah, the move is pretty incredible. It just looks like a straight line going upwards on the chart. But it's a closely watched metric. It shows how much more France has to pay to borrow debt than Germany does. And that spread is now the highest since 2011. It got to about 160 basis points yesterday. And it's also just a good indicator of how risky French debt is perceived versus the rest of Europe. So, you can look at these spreads for any number of countries, so Italy, Belgium, Greece, whoever. And currently, the French spread is the widest among euro area peers.

11:45 What about the spillover effect into other markets and also into the single currency.

11:49 The euro?

11:50 We have seen some signs of spillover, by which we mean sort of widening and spreads of countries other than France.

11:59 Sometimes you might hear it called contagion.

12:01 It's definitely something that the ECB and other European governments will be watching carefully. And also in terms of the euro, it has become more of a factor driving the single currency. We've seen some I wouldn't want to kind of overplay that, but there certainly is some correlation between the sovereign stress that we've seen in France and the performance of the euro more recently.

12:22 Okay. What do you think might be coming next? Because there's a rating decision from Moody's on Friday. Are we really looking at the ECB?

12:32 Yes, there is a Moody's decision coming and it's widely expected that they will downgrade France further. That would put it on a par with the other major ratings agencies, so Fitch and S & P. So, that's kind of widely expected. I'm not sure we'd necessarily see any market reaction to that. I think, yeah, we are certainly monitoring what the ECB is saying and doing with respect to France.

12:54 I think for now, it really very much wants market forces to try and impose some discipline on France and its politicians there. in terms of getting through a budget that's going to start to tackle that really large deficit. I think the ECB will try and sit out as long as it can. There's kind of complications around it, stepping in to help any one individual country if there are domestic issues. But, you know, ECB officials are commenting on it and we're kind of keeping an eye on the sentiment coming from them.

13:23 Yeah. Okay. Alice, thank you so much for taking us through then what we're thinking about when it comes to France, French borrowing costs, which have climbed above 5%. That is Alice Gledhill, Bloomberg's rates and FX reporter. Thank you. Stay with us. More from Bloomberg Daybreak Europe coming up after this. Now, amid all the deterioration in the relationship between Ukraine and the United States, Bloomberg reports that drone strikes and sanctions are making life harder for Russian oil giant Rosneft. Joining us now to discuss is Bloomberg's Tony Halpin, who leads our team covering Russia's economy and government. Tony, good to talk to you. How battered is Russia's oil and gas industry currently?

14:05 Good morning. Well, it's certainly bearing a great deal of the brunt of Ukraine's attacks, for example, on refineries. The company we focused on today, Rosneft, which is Russia's largest oil giant, it's run by a very close ally, Vladimir Putin. It runs about a third of Russia's total oil processing capacity, for example. And There were 15 Ukrainian drone strikes in September, and five of those were Rosneft facilities. So, the company is facing a difficult period. Income is down, debt is up.

14:38 And generally, the Russian oil industry is struggling to maintain output because of the Ukrainian attacks and the impact it's having on processing and simply their ability to export oil.

14:49 So then how much pressure is Ukraine putting on Russia sort of more broadly when it comes to this war and on the battlefield?

14:57 Yeah, it's a difficult one to assess. I mean, if you look at the front lines, they're not really moving very much. I mean, Ukraine has said that it's taken back more territory than Russia's managed to gain in recent months. So, they seem to be holding their own. But it's very much now an air war. So, every day you see Russia striking Ukrainian cities, particularly targeting things like power and water.

15:18 They're trying to break morale. And in response, Ukraine is targeting things like refineries. logistics centers, data processing, to try and do as much damage as possible to Russia's economy and make it difficult to sustain the war by hitting the Kremlin in the pocket, essentially. So, neither side is really able to make a breakthrough, and they're doing their best to inflict as much damage on the other as possible. Yeah.

15:40 Yeah. Will that matter? I suppose is my blunt question, because there are more talks between the US, Russia, maybe Ukraine, but Zelensky is fighting actually just for a seat at that table, let alone the Europeans. So will it matter?

15:57 Yeah, I mean, that's a key issue, really. I mean, Ukraine wants to be at the table with support from Europe because it increasingly sees that the U.S. under Donald Trump is leaning towards Russia. Russia is playing very heavily on that. You saw yesterday the U.S. envoy Steve Witkoff in Moscow talking to Vladimir Putin, calling him a humanitarian, for example. and generally looking for ways to find a solution that's acceptable to Russia. But what Russia wants isn't acceptable to Ukraine, and therefore we've got this very difficult stalemate.

16:27 And Ukraine needs to be at the table to keep arguing its case, and it needs European support to counterbalance the U.S.

16:34 Influence.

16:34 It's a tricky one for Zelensky at the moment. He's holding his own. But again, nobody sees a breakthrough that's really going to make a difference.

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