Markets Rush To Safety, French Military Protest Deployment, Brexit-Sized Confidence Slump

0:02 Bloomberg Audio Studios Podcasts Radio News.

0:10 This is the Bloomberg Daybetcure podcast. Good morning. It's Friday, the 23rd of October in London. I'm Caroline Hepke. Coming up today, AI bubble fears spark a rush to US treasuries, but French bonds fail to benefit from any safe haven piling. Macron prepares to deploy troops and extra police officers to the streets of Paris as the country braces for another weekend of protests. Plus, do no harm. Britain's Chancellor looks to avoid big tax or spending moves as higher borrowing costs squeeze his room for manoeuvre. Let's start with a roundup of our top stories. A deepening route in AI-linked shares is sending investors scrambling for the safety of US government bonds. Treasuries posted their best day in more than

0:55 two years, with the 10-year yield falling back below 5%. That's as U.S. chip shares plunged as much as 7.3%, as investors questioned whether massive AI spending will deliver enough returns. That concern goes to the heart of the current tech sell-off. Can companies actually monetize the huge sums that are being poured into AI? Nancy Tengler of Laffer Tengler Investments says that is now the key question for investors.

1:24 You're damned if you do and damned if you don't on CapEx spending. So I think as an investor, I have to step back and say, what's the reason? Are they making the right decision for the long term? Have they been able to monetize? Will they be able to monetize the spend? And we're seeing a number of the companies that started last quarter being able to monetize their AI spend.

1:46 That was Nancy Tengler of Laffer Tengler Investments. The flight to safety is also exposing fresh stress in France, where bonds are being sold rather than bought. French 10-year yields now exceed U.S. equivalents for the first time since 2013. And the spread over German debt widened to 178 basis points, its highest since late 2011. Well, France is preparing to put troops on the streets as it braces for another weekend of protests. Soldiers will guard sensitive buildings. And on top of a 20% increase in police, specialist forces normally used for missions including counterterrorism will also be available. President Macron says that only protests organised by labour unions will be authorised this weekend. The UN Secretary General, Antonio Guterres,

2:39 says the violence is unacceptable, but legitimate grievances must not be suppressed.

2:46 Let me be clear, the violence and destruction we have seen on the streets is unacceptable and those responsible for criminal activities must be held accountable. At the same time, we cannot let intolerable violence obscure the legitimate and very real grievances of the many peaceful protesters. We must connect the dots and better understand how deeply linked those very real and peacefully expressed grievances are to the wider turmoil in our world.

3:15 Antonio Guterres there, after French supermarket chain Carrefour warned earlier this week that the unrest will weigh on its earnings this year, highlighting the economic impact of the riots. There is a growing divide over how much further the ECB will raise interest rates, as oil remains well above $ 110 a barrel. The vast majority of economists surveyed by Bloomberg expect a pause next week, followed by a single hike in December– Traders, by contrast, are betting on three more hikes over the next year. The gap reflects disagreement over how far energy costs will go in terms of the increase and how much that will feed through into inflation.

3:56 While investors remain focused on rising oil prices, economists see little evidence of broader knock-on effects, at least so far. Banks, airlines and governments across Europe, Asia and the Americas are pulling down websites to avoid them being hacked. Artificial intelligence models help to find vulnerabilities in a commonly used programming language this week called PHP. Cloudflare's CEO Matthew Prince says that there are already huge numbers of attempted hacks.

4:29 Hackers right now are exploiting this flaw at just incredible rates. Literally, we're seeing millions of attempted attacks using this flaw now across all of our network every single minute of every single day. So the flaw is now known. And if you are running PHP on your servers, you need to update PHP to the latest version.

4:53 It's free.

4:54 You can get it updated immediately. And that's the only thing that's going to keep you safe.

4:59 That was the CEO of Cloudflare, the cybersecurity firm. He added that he saw AI as the hero of this story for finding the issue. The discovery of critical flaws is set to accelerate as AI models increasingly search software for weaknesses and loopholes. More than 30 government services here in the UK, though, went offline while PHP security updates were applied. UK consumer confidence has dropped in a Brexit-sized slump as cost of living pressures bite. GfK's index fell 11 points in one month, erasing all of the improvements since Andy Burnham became Prime Minister in the summer. The news comes the week before the UK budget as Chancellor John Healey tries to avoid provoking bond markets. The CEO

5:46 of Gresham House, Tony Dalwood, told Bloomberg Radio he sees the government delivering style over substance.

5:54 It appears that they pay a lot of lip service to the business, and they do to a lot of other stakeholders in the economy. The reality is the structural changes and actually the substance behind the words. When this government came to power, it talked about economic growth being at the core, and then we saw things like reduction in the VCT tax relief in order for early-stage companies.

6:18 Tony L. Dalwood there, who added that bond yields show markets are nervous about the UK's economic outlook. The Chancellor is announcing today the budget will cut red tape for businesses, including simpler corporate reporting and extended import tariff suspensions. President Trump reportedly asked Elon Musk to lift restrictions on the Starlink satellite service used by Ukraine. The Wall Street Journal reports Trump expressed frustration that the system speeds were still being capped. When asked if he had called the SpaceX boss, the president refused to be drawn.

6:54 I don't want to say, but I know it was a very interesting situation. So I don't want to comment one way or the other. But my relationship with Elon is a very good one. Go ahead. Yeah, I don't want to comment on it. You know, whether I called or whether somebody else called doesn't make any difference. I guess the bottom line, he put it back.

7:20 That was President Trump speaking to reporters. Bloomberg understands that Ukrainian troops are still seeing limits on connection speeds, although the service improved slightly in some areas. Well, President Trump's claim of a very good relationship with Musk follows a fresh injection of donations from the world's richest man. SEC filings show Musk gave an extra $ 77 million to his political action committee in the first two weeks of October.

7:51 That brings his total donations in this election cycle to more than $ 445 million in an effort to see Republicans elected in November's midterms. Michael Bloomberg, the founder and majority owner of Bloomberg LP, the parent of Bloomberg TV and radio, contributed about $ 80 million in September and October to help Democrats in the midterms. Those are some of our top stories for you today. Let's look at the markets. Asian equities staging something of a recovery after the opening losses that we saw. For example, the KOSPI was down more than 4%, so a really big plunge, but actually now that loss is only about half of 1%. Stock futures then for the Nasdaq in the red, along with US stocks, are 50 futures, so it still looks quite tentative after

8:39 the major tech rout. Yesterday, 10-year US Treasury yields fell 17 basis points on Thursday to 4.96%. Today, this morning, Japanese 10-year bonds falling 10 basis points. Brent crude futures very close to $ 114 a barrel. We had L'Oreal curving earnings out yesterday. L'Oreal sales surged 7.7%, so one that we were watching in Europe. Now, in the next part of Bloomberg Daybreak here, we are going to think a little bit about the budget and the plunging consumer confidence that we've seen just in the past few weeks. Plus, we will Get to grips with what's been happening in the French bond markets today and yesterday. So that in a moment, but something else has caught my attention. AI agents are coming for your bank account and for the

9:25 easy money that sits as bank deposits. Bloomberg Opinion columnist Andy Mukherjee has been writing that the days of customer inertia may be over as we get comfortable with AI agents. I think it's an extraordinary story. Imagine a world very, very soon where an AI agent makes financial decisions instantly.

9:45 For you, customers who have cash languishing in low interest rate accounts will have an ally hunting for better yields at the lowest possible cost. It is going to put perhaps every idle dollar, pound, euro to work. And that is a massive savings revolution that Andy writes about beautifully about how this is going to be very expensive for the banks. Wall Street titans like Citigroup, Bank of America, JP Morgan reportedly are blocking AI agents for now. But he says the resistance is futile. They're not going to be able to resist these AI agents. There'll be a push from business for them. They'll end up having to adopt them. And that will be expensive because they'll have to invest in new technology. to protect their customers, to

10:30 deliver AI agents. And then their margins are going to get squeezed on all fronts. On the deposits, it will be much more mobile, but also then having to spend on AI. Andy Mukherjee says it was quite easy for them to fend off the crypto bros. That revolution really didn't happen. But AI is going to be a much bigger threat. I am putting a link to that into the podcast show notes because I think that is the most important story for you to read.

10:58 This morning now.

11:00 The threat of another weekend of protests in france and the concerns about the inability of lawmakers to address the country's debt burden has piled further pressure onto french bonds joining us now is the fx and rates reporter georgia hall georgia fantastic to speak to you again you are on our programs all day yesterday explaining all the moves in the bond markets the french year yield has surged this week can you explain what is happening in markets Absolutely.

11:28 I mean, France has definitely been keeping us busy this week. What happened this week and especially yesterday was the market turned to this risk-off environment. And that meant that traders started dumping those positions in assets which don't look as certain or as rosy. And in France, we have this unsettling fiscal and upcoming political situation. And that meant that there's not much reason to be holding these positions. There's no sort of positive near-term catalyst to take the long position.

11:57 And so, that means with no one taking that side, the dumping has a sharp move. So, what we saw was there was the weekly widening of the spread between French and German 10-year government bonds is set to break another record this week that we got to When these moves started at the start of October, the widening is now at 175 basis points, the highest since 2011. 190 basis points would be a market closing all-time high. So, we're really not very far from that. And Another big cause for concern that has come to the mind of a few investors that we've spoken to is that a lot of these moves in France as well have been in the front end of the yield curve. So, if this was just a move on the back of this

12:40 fiscal story, that would be one thing. But at the front end, that means that traders are starting to price in more of that near-term risk.

12:47 And that's sometimes the sign of technical default.

12:52 Okay.

12:53 The other thing that I want you to layer into this story, though, is whether there is a risk to German bunds, but also that U.S. treasuries have interestingly been surging because the world is rushing to the relative safety of the U.S. because there's also an AI story here.

13:12 Absolutely.

13:13 We have this flight to quality move. The US Treasury 10-year yield was hovering pretty comfortably at 5% for much of the past month.

13:22 And now it's dipped just below that.

13:24 In terms of whether it's affecting bonds, we're not seeing that quite yet.

13:29 It's quite interesting.

13:30 Up until very recently, bonds were tracking very closely the energy price moves that had spilled out from the conflict in the Middle East. And we saw that synthetic relationship start to break down yesterday in both bonds and in treasuries.

13:45 So, for now, bonds are safe, I would say.

13:48 Italian BTPs are certainly one to be watching more closely.

13:51 Okay.

13:52 What do you think might be the ECB reaction? Watching, obviously, but anything else?

13:59 It's hard because the European Central Bank is currently in its communication blackout ahead of its.

14:05 Interest rate meeting next week.

14:09 There could be some change in messaging at that policy meeting or perhaps prepped responses to questions that I'm sure they know that they'll have. If we do perhaps see that spread widening to 190 basis points, maybe they break that, maybe they step in. There are a few different tools that they have that they could use. They could change their plan for interest rate hikes. They could perhaps pause their program of quantitative tightening to help ease some of this liquidity pressure that you have or even something more drastic and consider using TPI and do some target purchases of bonds.

14:45 Yeah, that would certainly be a very big move, wouldn't it? Look, the other thing that I wanted to mention is that global credit spreads have also hit their highest in 17 months. So, these are the dollar bonds of higher rated Asian companies. Again, what does that mean? I mean, that also is a bit related to AI, but I think as we think about fixed income markets is very important.

15:08 Yeah.

15:10 Absolutely.

15:10 I mean, it's the sustained repricing of credit risk that's trickling through.

15:15 And that's what we're seeing in the sovereign space. We've had throughout this.

15:19 Week just these mounting concerns about the rapid pace of debt that's coming from this AI rollout. And while those fears aren't new, it seems to have reached some kind of precipice this week. And that's what we're seeing trickle through to the credit markets.

15:34 Yeah, fascinating. Georgia, thank you so much for being with us. That is Bloomberg's FX and Rates reporter, Georgia Hall. I think, yeah, pointing to the issues in the sovereign bond markets, I think, in a very neat way. But we'll be watching that this Friday. Thank you. Stay with us. More from Bloomberg Daybreak Europe coming up after this. In the UK, consumer sentiment plunged in October, according to the latest GFK Confidence Index.

16:03 It comes only days ahead of the budget. Joining us now, Bloomberg's UK reporter, James Walcock, in the studio. There was a summer bounce in optimism. It's faded quite quickly.

16:14 Why?

16:15 Why?

16:16 Now, that is the big question. To be short, the good vibes have hit the wall of reality. I mean, if you look at the economics of this, Caroline, you are seeing diesel prices hitting a record £ 2 a litre, unleaded petrol prices risen 32%, household energy bills forecast to rise even higher. And as George was just pointing out, borrowing costs are increasing. So, you're seeing mortgage prices go up. Now, Now, it's worth pointing out, these are two sentiment data you're getting. Gfk, who I was reading their report, Neil Bellamy, their consumer insights director, says this has been an extraordinary collapse and called it relentless costs of living pressures are now coming to bite. And then the British Retail Consortium said earlier

16:57 this week that confidence in personal finances fell to its second lowest level on record. And so, we are seeing this sudden plunge in sentiment as a government that has prided itself on bringing back the good times and the good feeling is about to issue its first budget. So, it's not really the mood music that they would have wanted going into this kind of big set piece event.

17:19 Yeah. The thing that I took away from that GFK data is that sentiment deteriorated across all income groups globally. And that higher income consumers, the only group apparently still spending on things that go beyond just essential spending, suffered the worst decline. So, I think that's sort of quite interesting to know in some ways. How do you think all of this sets up the budget then? And what are we expecting?

17:44 Well, I mean, I think it shows the Chancellor understands the test. Let me give you the slogans that they're trying to put out in the Treasury and in the government. They want to give breathing space. And this is a cost of living idea. They want to address the cost of living and they want to address the cost of doing business.

17:57 That's their three goals.

17:59 I think in terms of how we as journalists judge this, there are three sort of tests, which is when we hear the Chancellor get up to speak, What is the headroom? He inherited £ 24 billion. Bloomberg Economics and the median estimates in the bond markets reckon that he is left with about £ 15 billion, give or take. The question is how much he rejuvenates, puts back into that space. And then, with whatever taxes he raises, there have been reports about a bank tax, there may be other small taxes, the Labour government have... said they will not be touching the sort of big four, as they are known, the revenue raisers that they committed to not touching in the 2024 election.

18:36 What can John Healey do with that space? That's the second question. What kind of measures can he do? Energy bill support is supposed to be one of the big centrepieces of this budget. And energy bills and the impact of the war on Iran are seen as the big global backdrop looming over Britain that Britain can't escape. And then the third question is, does it really amount to much, whatever Healey does? And with these looming energy bill rises, with this sentiment decline, does the Chancellor have the fiscal wherewithal to actually shift the needle? And despite the fact that he also has to placate the bond markets and anything too radical will unsettle bond yields.

19:16 Yeah.

19:16 I mean, there are signs, though, of resilience in the wider UK economy. OK, the consumer data is not that great, but actually the growth data has been decent. And UK gilts also in the bond markets have been outperforming, interestingly.

19:32 I think you have to look at the story of this government. Look back to summer, when Keir Starmer left office, Andy Burnham came in, and there was, if you look back at what was being promised then, there was a lot of nervousness from people in the trading world about what Andy Burnham was saying, what was promising. There was a famous one where he promised he would look at the personal threshold for income tax, and then that was walked back within days. The story of this government has been over the three or four months they've been in office, getting to grips with Iran, getting to grips with President Trump, getting to grips with what they can do, a lot of that rhetoric has disappeared. And now we are looking

20:04 at a do-no-harm budget, and the market seems a lot more settled than what it can expect from this government. I think the question going forwards from the budget is what happens to the next step of that feedback cycle? What happens when the MPs, when the public see the political reaction? And do they feel that this is enough from this person they have elected, Andy Burnham, in Labour circles to do better than Keir Starmer and Rachel Reeves in winning back the public? So we'll see that, I think.

20:32 The Chancellor has a very difficult job next week. We will see how this balancing act goes and if the public buy into it.

20:38 Yeah. And I think an awful lot hangs on it. I think that's the other interesting thing. I mean, you can't imagine many voters maybe following minute by minute what the Chancellor has to say. And yet what emerges from it, as, for example, our opinion columnist here at Bloomberg, Mihir Sharma, has pointed out, that a Barclays survey has found that 64% of UK companies are waiting to see what Healy has to say next week before they make investment decisions. So, you know, a lot is actually riding on this budget. Fascinating.

21:12 Thank you for.

21:13 Listening to Bloomberg Daybreak Europe. If you've enjoyed the podcast, give us a follow, leave a rating or review and maybe send it to that one friend or colleague who's always trying to keep up with the news. And if one podcast a day isn't enough, you can listen to us live every weekday from 6am in London on DAB radio, on TuneIn and on the Bloomberg Business app. Or if you've got a smart speaker nearby, just say play Bloomberg radio.