Something that is now clear post the UK “mini” budget last week, but has really been true for a while now is, the marginal factor in markets over the past six weeks has been the massive repricing of European rates. Sure, the Fed has been one, mixed inflation data another, and many others. But, in the span of six weeks, 10y UK gilt yields have risen over 200bps while the Pound has fallen, and the spillover effect from that dynamic is reverberating across global asset classes. Because while the new UK fiscal plan is extremely aggressive, and the effects on rates/FX have been most extreme in the UK, there has been this broader dynamic in G10 non-US where FX is falling and yields are rising.
I think to start, its best to zoom out and bring in the general macro picture.
The global economy is dealing with an energy shock, which has led to a terms of trade shock for most of the developed world. That led to a weaker EUR and also weaker European fixed income because rates have to become part of the adjustment mechanism when the trade balance is wrecked. So EUR, GBP, SEK etc. have all traded lower and interest rates have surged; the question for global markets has been, but what does this have to do with real rates in the US, commodities weakness, and why equities have gone onto to make new lows in the S&P 500?