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Submitted by QTR's Fringe Finance

I‘ve been harping on the problems in commercial real estate for years now, and one of the more interesting developments over the last several months has been how little anybody seems to be talking it them anymore.

For a while, commercial real estate was supposedly going to bring down the banking system. Then the regional bank failures came and went, the Federal Reserve helped stabilize the financial system, and the market collectively decided that the problem had been contained.

But just because something has disappeared from the headlines doesn’t mean it has disappeared from the balance sheet. In fact, I would argue that we’re approaching precisely the point in the credit cycle when some of the more serious problems should start revealing themselves.

Credit conditions are tightening, borrowing costs remain elevated, and we’re beginning to see signs of strain in private credit. It would be remarkable if commercial real estate, which spent the better part of the last decade gorging itself on cheap financing, somehow emerged from this environment completely unscathed.

And now we have some new numbers that suggest the problem is very much alive.

According to a recent report from CRE Daily, citing research from commercial real estate analytics firm Trepp, an alarming percentage of office properties approaching refinancing simply don’t generate enough cash flow to support replacement financing under today’s conditions.

Trepp examined 309 commercial mortgage-backed securities office loans totaling $18.2 billion, all scheduled to mature by September 2027, less than a year from now.

Its findings were extraordinary: approximately 75% of Class A office loans would require additional equity to refinance, compared with 61% of lower-tier Class B and C properties.

Think about that…these are supposed to be the crown jewels of commercial office real estate. The nicest buildings, in the best locations, with the strongest tenants. And three-quarters of the loans in this particular sample may need somebody to show up with a fresh pile of cash just to get refinanced.

The reason is straightforward. During the era of cheap money, lenders and borrowers structured enormous amounts of commercial real estate debt as interest-only financing. Rather than paying down principal over time, property owners simply serviced the interest and assumed they could refinance when the loan matured.

That strategy worked beautifully when interest rates were falling and property valuations were rising, which everyone assumed would go on forever (thanks, Janet Yellen). It looks considerably less brilliant today.

Trepp found that roughly 80% of the maturing Class A loans in its sample were interest-only, compared with approximately 55% of Class B and C loans. Among interest-only loans, 84% faced refinancing shortfalls. For loans that had been amortizing, that figure dropped to 40%.

In other words, the problem isn’t necessarily the quality of the real estate. It’s the capital structure attached to it.

And that’s something I’ve been arguing for years: when an entire financial system gets accustomed to refinancing debt instead of actually paying it down, rising interest rates eventually expose just how much of the apparent prosperity was dependent on cheap credit.

Also, the income numbers make the situation even more troubling. Trepp calculated that refinancing just half of a maturing loan balance at par following a two-year extension would require annual net operating income growth of approximately 18%.

For context, median office NOI growth between 2020 and 2025 was just 0.6% annually. Good luck closing that gap with rent increases.

Meanwhile, the 10-year Treasury yield recently climbed above 5%, putting additional pressure on commercial borrowing costs. Even if the Federal Reserve cuts short-term interest rates, there’s no guarantee longer-term yields will cooperate, particularly with inflation concerns and federal borrowing requirements hanging over the bond market.

This creates a rather unpleasant situation for property owners who borrowed against valuations established in an entirely different interest-rate environment.

And the maturity schedule suggests we’re nowhere near finished dealing with it.

Trepp estimates that $78.1 billion in private-label CMBS loans will reach their final contractual maturities between October 2026 and the end of 2027. Approximately $61.1 billion of that comes due next year, including $22.2 billion tied to office properties.

Nearly $22 billion of the overall maturity pool carries debt yields of 8% or less, suggesting substantial refinancing challenges.

Meanwhile, the distress is already showing up in payment performance. As of September, CMBS loans at least 30 days delinquent totaled approximately $48.7 billion, representing 8.02% of the $606.6 billion tracked by Trepp. That’s an increase of nearly 12% since the beginning of the year.

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These are not numbers that suggest everything has magically healed itself.

Consider two Manhattan properties highlighted in the report. At 667 Madison Avenue, an approximately $254 million refinancing was completed despite weakening debt-service coverage. Meanwhile, 60 Madison Avenue saw its $100 million loan transferred to special servicing after occupancy declined to 58% and operating income deteriorated sharply. Same city. Same asset class. Very different outcomes.

I don’t think every commercial property is going to default, nor do I think every refinancing problem necessarily translates into a catastrophic loss. Some owners will contribute additional equity. Some lenders will extend loans. Some properties will find buyers, and others will be restructured.

But none of those options makes the underlying economic losses disappear.

A loan extension is not a recovery. A refinancing that requires a substantial equity injection is not evidence that the original investment worked. And a lender avoiding foreclosure doesn’t mean its collateral is worth what it was five years ago.

Or, in other words…Extend And Pretend Eventually Comes To An End

It simply means for now the financial system has found another way to postpone recognizing the damage.

The larger concern, in my opinion, is what happens as these problems collide with tightening credit conditions elsewhere.

Private credit has its own issues with valuations, liquidity, underwriting and borrowers who have grown accustomed to abundant financing. Regional banks still carry substantial commercial real estate exposure. And institutional investors that once viewed office buildings as dependable sources of income are discovering that both their cash flows and their exit valuations can deteriorate simultaneously.

These problems don’t have to explode all at once to become meaningful.

In fact, commercial real estate distress may continue unfolding as a slow-motion balance-sheet adjustment rather than a single spectacular crash. Losses can be absorbed through restructurings, equity write-downs, bank provisions and years of diminished returns.

But that doesn’t mean the consequences won’t eventually spill into broader lending conditions.

When banks become less willing to extend credit, borrowers have fewer refinancing options. When refinancing becomes more difficult, collateral values come under pressure. And when collateral values decline, lenders become even more reluctant to lend.

It’s a familiar feedback loop, and one that has played out in virtually every major credit downturn.

Of course, there are reasons not to assume the worst. Office markets are highly fragmented, some premium buildings continue to attract tenants and financing, and stronger sponsors may have sufficient liquidity to weather the storm. The Trepp sample is also concentrated in securitized office loans and shouldn’t be mistaken for a complete picture of every commercial mortgage in America.

Still, I find it difficult to look at these numbers and conclude that the commercial real estate crisis is behind us. If anything, the next 12 to 18 months could be considerably more revealing than the last 12 to 18 months, particularly if long-term interest rates remain elevated and credit availability continues to deteriorate.

I’ve been warning about this sector for years, not because I believe every office tower is worthless or every bank is insolvent, but because the mathematics of commercial real estate financing changed dramatically when the era of free money ended.

And mathematics has a funny way of eventually asserting itself, regardless of how many extensions, modifications or optimistic valuations get thrown at the problem.

The commercial real estate crisis hasn’t necessarily ended. We’ve simply gotten bored of talking about it. And as we’ve learned from previous credit cycles, that’s often when investors should be paying the closest attention.

--

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Facing pressure from President Trump to halt all attacks on Russian refineries, Ukraine's Zelensky is perhaps getting his last licks in. Overnight Ukraine sent a record number of drones into Russian territory, with Russia's military saying it intercepted over 1,200 drones across the country.

This means that in total that many hundreds more were likely launched, or possibly even thousands, as part of the long-running Ukrainian UAV strategy of overwhelming Russian air defenses.

The Moscow region was once again heavily targeted, with the city's Mayor Sergei Sobyanin claiming that 613 drones had been sent on the capital area alone.

“The majority were neutralized by the Ministry of Defense’s air defense forces at a great distance. 231 drones were destroyed as they approached Moscow,” Sobyanin said.

Operations at capital region's airports were once halted due to the inbound threat, including at Domodedovo, Vnukovo, and Zhukovsky - but by morning the restrictions were lifted.

Significantly, the attack happened as currently more than 22 foreign leaders are being hosted at the Russia-Africa summit in Moscow, which has also had President Putin's participation.

The Russian defense ministry listed out in addition to the Moscow region that there were attacks on the territories of the Bryansk, Belgorod, Kursk, Kaluga, Tula, Smolensk, Lipetsk, Voronezh, Tver, Oryol, Ryazan, Vladimir, Samara, Saratov, Penza, and Rostov regions.

As for impacts and damage, one notable hit occurred on the Bashkir Soda Company (BSK) in Republic of Bashkortostan, according to Russian independent outlet Astra. 

For more background:

BSK is one of Russia’s largest chemical complexes and the country’s leading producer of soda ash and baking soda. The enterprise is part of the Roskhim holding company, which owns a controlling 57.43% stake.

The complex is also listed in the Russian Ministry of Industry and Trade’s classified registry of defense-related enterprises. BSK supplies military-industrial plants with hydrochloric acid and dichloroethane and is Russia’s sole producer of terephthaloyl chloride, a compound used to manufacture synthetic ballistic fibers, high-strength polymers, and aramid materials. These materials are used in body armor, helmets, and protective components for military equipment and aircraft.

While none of this has substantially changed Russian forces' ground momentum along the front lines, the Institute for the Study of War has recently said that the aerial campaign is effectively pressuring the Kremlin, given the steady economic setbacks and devastation.

In Ukraine, Russian aerial strikes have continued to result in high casualties among civilian bystanders:

At least 13 people have been killed after a Russian drone hit a busy platform at the main train station in the Ukrainian city of Dnipro, officials said. State rail company Ukrzaliznytsia said on Thursday that a jet-powered drone hit the platform where a train was preparing to leave for the nearby city of Zaporizhzhia.

Regional Governor, Oleksandr Hanzha, said on Telegram that at least 14 others were injured and six were in critical condition, including an 11-year-old boy.

President Zelensky condemns the "horrific attack"...

"Moscow simply does not have enough air-defense coverage to shield every piece of infrastructure in its rear, even ten of its most valuable commercial sites," an ISW assessment concluded. However, nothing has indicated that President Putin is ready to change course - instead we are seeing things steadily escalate on both sides.

The US economy grew in the third quarter at the fastest pace in a year, supercharged by the debt-funded AI capex spending spree and a resilient American consumer.

Real Gross domestic product (adjusted for inflation) increased an annualized 3.4% in the three months through September after growing 2.2% in the second quarter, according to the initial estimate by the Bureau of Economic Analysis. The rise in GDP beat the 3.2% median projection in a Bloomberg survey of economists.

Real final sales to private domestic purchasers - a closely watched metric that combines consumer spending and fixed private investment - rose 4.9% in the third quarter, up from 4.6%. Government spending also increased, largely reflecting oil sales from the Strategic Petroleum Reserve. Higher imports, which count as a negative in calculating GDP, offset some of the gains.

While personal spending came in stronger than expected, rising an annualized 3.8%, above estimates of a 3.4% print, the biggest driver behind the world’s largest economy continued to be relentless business spending (which has resulted in a massive debt bubble to go along the AI stock bubble). Outlays for equipment contributed more to GDP in the third quarter than at any time since 2011 outside of the pandemic rebound.

Household spending was similarly robust, increasing an annualized 3.8% for a second straight quarter, even amid historically low consumer sentiment tied to cost-of-living concerns. 

“It looks like a strong quarter driven by domestic demand activities and a drag from trade,” said Eric Winograd, senior economist for fixed income at AllianceBernstein. “We talk about the boost to growth from AI, but a lot of that stuff is imported.”

Meanwhile, separate figures from the agency showed inflationary pressures mounted at the end of the quarter. The personal consumption expenditures price index - the Fed's preferred measure - rose 0.5% in September, the most in six months. Excluding food and energy, the so-called core gauge advanced 0.3%; both were in line with estimates. 

Federal Reserve chair Kevin Warsh said on Wednesday after the central bank held rates steady that “economic growth has strengthened” as he hailed “healthy” consumer spending and capital expenditures that he said were at a “historically high share of GDP”.

The GDP report is the last major reading on the health of the US economy before next week’s midterm elections, whose results will determine who controls Congress for President Donald Trump’s final two years in office, with many campaigns targeting concerns around affordability and high prices.

The number of American filing for unemployment benefits for the first time dropped (again) last week to 194k (less than the 198k exp) - basically in line with 60 year lows...

Continuing Claims also ticked back down, very close to 3 year lows...

The cleanest way to reconcile it is that this is a "low-fire, low-hire” labor market, with employers hoarding labor, not shedding it.

Of course, claims remain a poor gauge of how hard it is to get hired, since new entrants, re-entrants, and gig workers mostly can’t file.

Low firing plus low hiring means insiders feel secure while anyone outside the job market is stuck.

Of course, sentiment remains disastrously low, but we'd argue it’s mostly a prices story wearing a jobs costume (impacted by political bias within the polling).

As we noted last week, the bottom line is that claims tell you a recession isn’t imminent, payrolls tell you momentum is fading, and sentiment tells you the median household is  rather than layoffs.

The risk is that this equilibrium breaks non-linearly: low-hire markets can flip to firing quickly once margins compress, and claims would be the last of the three to flag it, not the first.

Authored by Steve Watson via Modernity,

In an incident proving that TDS is still rampant, a Michaels Arts & Crafts store in Mayfield Heights, Ohio, refused to custom-frame a portrait of President Trump, as well as a historic moon landing newspaper, and a religious-themed art print.

Employees told the customer the items were "ineligible" and that the company does not do "political pieces." One account of the encounter says an employee stated on camera that "Our company hates the President."

Corporate later insisted no such policy exists. The employees remain on the job. Customers are already shifting business elsewhere and floating simple tests of consistency.

This past weekend, Terpsehore "Tore" Maras walked into the Michaels at 1361 SOM Center Road with three items for framing: an original front page of the Cleveland Press from the moon landing era, a Jon McNaughton print, and a portrait of President Trump.

According to her complaint and the video she posted, a framing associate examined the pieces, left, and returned with a manager. The staff declared the items "ineligible" under company policy and said they were "not allowed to do political pieces."

Maras has said she explained the work was for private home display, not campaign material. The refusal stood. In the interaction she asked whether this was official policy, noting "it's not political, this is for my house."

She later recorded a call to Michaels customer care. The representative described a policy covering "sensitive items or things that are inappropriate," then declined to say whether a moon-landing newspaper, a presidential portrait, or religious artwork fell into that category.

Maras filed a consumer complaint with the Ohio Attorney General's office. She has accused the retailer of misrepresenting why an advertised service was unavailable. Cleveland.com reported the filing and the company's response.

A Michaels spokesperson told the outlet: "At Michaels, we are committed to providing a welcoming experience for every customer. Michaels does not have a policy prohibiting the framing of political items. We are following up with the customer to make this right and ensure her project needs are met."

This is not even the first time. In November 2024 a Michaels in Sequim, Washington, declined to frame the well-known photo of Trump raising his fist after the Butler assassination attempt. Employees said they were uncomfortable.

Corporate called it a misunderstanding; a framing manager later apologized and offered to complete the order. The pattern of local staff citing an unwritten ban, followed by corporate denial, has repeated.

A Case Western Reserve University law professor noted in the Cleveland.com piece that a private retailer could "very likely refuse" service on political grounds without violating public-accommodation laws, which typically protect categories such as race and sex rather than viewpoint.

The customer's complaint focuses more on alleged misrepresentation of the reason for refusal than on a free-speech claim against the company.

Public reaction has been direct. Customers have announced they are moving holiday crafting purchases to Hobby Lobby and other competitors.

Others have proposed a straightforward consistency check: bring photographs of Obama or Biden, or newspaper front pages from the George Floyd period, and see whether those items receive the same "political pieces" treatment.

One reply suggested flooding the specific store with Trump images so the same employees must process them under the company's stated policy.

Michaels is owned by Apollo Global Management, which took the company private in 2021. The framing counter is a routine service sold to any customer.

The company has said it will complete the order. Whether the employees who cited a nonexistent policy face any consequence has not been announced.

Three tankers exploded ?and caught fire in the Strait of Hormuz after attempting 'unauthorized' passage over the prior 24 hours, according to Iran's Revolutionary Guards (IRGC) on Thursday.

The trio of vessels are alleged to have ignored warnings from the IRGC Navy, having also switched off their radar and ?navigation systems, apparently as part of US-backed operations to ferry crude out of the strait.

British maritime agency UKMTO confirmed that at least one of the ships is on fire, and has conveyed a report that another is also in distress.

News of the vessel hits emerged after Iranian Foreign Minister Abbas Araghchi wrote on X Wednesday that Iran "continues to give diplomacy a chance to succeed" - even as Tehran has continued to hold a firm line on not being willing to negotiate the nuclear file until after the conflict is closed.

DropSite News reviews of the diplomatic front, which has long been stalemated with no forward momentum of late:

• Iran is in "close and ongoing contact with intermediaries" to carry out its 7-Day Plan "in even less than a week," Iranian Foreign Minister Abbas Araghchi wrote on X Wednesday, adding that Iran "continues to give diplomacy a chance to succeed."
• A new Qatari draft deal, delivered to Tehran on Sunday, would have Iran reopen the Strait of Hormuz within four days of sanctions being lifted, down from the seven Iran originally proposed, the Guardian reported. Iran's response is expected by the end of the week.
• Iranian leaders have also "received well" a letter from Vice President JD Vance proposing renewed talks and a meeting, The New York Times reported. The Times said a response to that is expected on Thursday.

Very remote, vague footage has emerged purporting to show a tanker burning on Thursday:

On the letter, the White House thinking is that a better diplomatic result could be achieved by opening dialogue with other echelons within Tehran leadership.

"Vance sent a letter to Mohsen Rezaei, the secretary of Iran's top security body, the Supreme National Security Council, and previously Iran’s longest-serving commander of the Islamic Revolutionary Guard Corps, according to the people," The Wall Street Journal initially reported late Wednesday.

"The letter was sent at Trump’s direction, one person said, and Trump is aware of the outreach. Vance is testing whether Tehran and Washington could find enough common ground to persuade Trump not to give a final order for a short, intense attack on Iran in the coming weeks," WSJ continues.

But all the while Iran's efforts to impose serious economic damage by seeking daily attacks on international shipping have persisted.

Iran has also asserting that Pentagon and White House declarations that the US has successfully demined the strait is false.

The spokesman for the IRGC, Brigadier-General Hossein Mohebi, has told US Central Command (CENTCOM) to "prove Hormuz’s de-mining claim with independent evidence, not a statement."

Iran also announced Thursday its forces hijacked an 'American spy drone' over the Strait of Hormuz and that it has landed intact:

"The reality of the Strait of Hormuz takes place in the sky, land and sea – not in cyberspace and American media war rooms," Mohebi said in a statement posted online. Apparently the Iranian side is offering as fresh 'proof' multiple burning tankers in the region in question.

Following the hot CPI and PPI (and the internals), this morning's PCE should not provide too many surprises with expectations for the headline price Index to rise a significant 0.5% MoM in September (accelerating notably after deflating for the first time since COVID in June).

And sure enough, headline PCE rose 0.5% as expected, pulling the price index up 3.6% YoY - highest since May...

The (old) Fed's favorite inflation indicator - Core PCE (a measure of price changes in consumer goods and services that excludes volatile food and energy costs) - printed in line with expectations (+0.3% MoM and +3.1% YoY), a very slight uptick...

The sudden resurgence in crude prices did not help at all, smashing PCE Energy to record highs!!

SuperCore PCE (Services ex-Shelter) surged to its highest YoY since Dec 2024...

Interestingly, and more problematically for The Fed, Acylical inflation is now hotter than Cyclical...

In other words, inflation is becoming embedded...which maybe why Services costs are making up such a huge proportion of overall costs...

And that is evident in the income and spending data, which both disappointed (Income +0.2% vs +0.5% exp and Spending +0.5% vs +0.6% exp

)...

Spending is accelerating while wage growth is decelerating...

And that dragged Americans' savings rate tumbling to its lowest since Oct 2022...

This is not good news... at all!

US futures are lower, with Nasdaq contracts sliding as Alphabet's ugly search miss revived the "is AI capex paying off" debate, while Microsoft's Azure beat and lighter capex, a roughly 1% drop in oil on fresh US-Iran diplomacy chatter and news that Christine Lagarde will quit the ECB nine months early round out the morning's drivers; as a result small caps outperform while the 10Y yield hovers just around 5%. As of 7:30am ET, S&P futures are 0.3% lower at 7,768 while Nasdaq futures are down about 1% and Dow futures are flat; Russell 2000 futures are up 0.5%. Yesterday the S&P 500 rose 0.28% to 7,744, closing within 1% of its record high after the Fed's on-hold decision, while the Philly semi index gained 1.75% led by an 11% surge in Oracle. In premarket trading, Mag 7 names are mixed: Alphabet plunges 10% after search and advertising sales missed, confirming our article from last night, while Microsoft rises about 3% after its Azure beat; software is down 3% (per JPM) after ServiceNow (-18%) and Fortinet (-26%) disappointed. The day's driver is (again) AI, only this time in reverse: JPM's desk says the market is trading with a defensive bias, with the AI theme being sold and Discretionary and Financials bid, "pointing to the broadening / ex-AI trade." Treasuries extend Wednesday's post-Fed gains, with yields 1-2bps lower (the 2Y touched 4.67% overnight), as traders trimmed bets on the pace of Fed hikes after Kevin Warsh's press conference (December hike odds are now about 80%); gilts and bunds also rise (though lag Treasuries) as European energy prices retreat. The Bloomberg dollar index is up 0.1%, paring the bulk of its Fed-induced losses, while EUR/USD lingers just above its year-to-date low into the ECB decision. In commodities, Brent briefly slipped to a $113 handle after Semafor reported the US is involved in talks on a temporary peace deal with Iran, even as Iran's IRGC claimed three tankers hit mines in Hormuz; gold falls 1% but holds above $4,000, silver slides 2.6% and copper is softer. Bitcoin is down 1.4% after dipping below $80,000. US economic data slate includes initial jobless claims, Q3 GDP, September personal income, spending and PCE (all 8:30am). The Fed is in its post-meeting quiet period with no speakers scheduled; Treasury auctions $44 billion of 7-year notes at 1pm.

In premarket trading, Magnificent Seven stocks are mixed: Alphabet (GOOGL) -10%, Amazon (AMZN) -1%, Nvidia (NVDA) -0.6%, Tesla (TSLA) -0.4%, Meta Platforms (META) +1.1%, Apple (AAPL) +1.2%, Microsoft (MSFT) +2.9%.

• Alphabet (GOOGL) plunges 10% after the company reported disappointing search and advertising sales that reinforced investor concerns about AI’s threat to its core business.
• Microsoft (MSFT) is up 2.9% after the company posted increasing growth in its cloud business and kept its capital expenditures in check, satisfying investors amid a drumbeat of concern that spending on artificial intelligence won’t pay off.
• Apple (AAPL) +1.3%, Meta Platforms (META) +1%, Tesla (TSLA) -0.2%, Nvidia (NVDA) -0.5%, Amazon (AMZN) -1.8%
• Software companies are broadly lower after disappointing quarterly results from ServiceNow and Fortinet added to concerns about the industry’s prospects in a world awash with AI.
• Blue Owl Capital (OWL) rises 4% after reporting a larger uptick in fees than analysts expected in the third quarter.
• Carvana (CVNA) is up 8% after the used-car retailer reported better-than-expected results on a key profit measure.
• Caterpillar (CAT) shares slump 9% after the company posted third-quarter earnings that only modestly beat expectations, raising concerns about the durability of the broad rally in AI-related stocks.
• Chipotle (CMG) is up 7% after the restaurant chain reported comparable sales for the third quarter that beat the average analyst estimate.
• DoorDash (DASH) agreed to buy rival Instacart (CART) in a deal that values the company at about $17 billion, the latest sign of consolidation in an increasingly competitive delivery market. Shares of Instacart are halted.
• EBay (EBAY) jumps 6% after the online auction company’s net revenue forecast for the full year beat the average analyst estimate.
• Fortinet (FTNT) plunges 26% after the security software company gave a disappointing outlook for service revenue.
• Glaukos (GKOS) is up 15% after the eye-focused medical device maker boosted its net sales guidance for the full year. The guidance surpassed Wall Street’s expectations.
• Marvell Technology (MRVL) falls 11% as the company is said to be in advanced talks to buy data center optics maker Lumentum Holdings (LITE), according to people familiar with the matter. Lumentum rises 6%.
• ServiceNow (NOW) drops 19% after the software company’s forecast for fourth quarter current remaining performance obligation fell short of the average analyst estimate.

In other corporate news, DoorDash agreed to buy Instacart for $65 a share in cash and stock, a $17 billion deal it plans to fund partly with debt; Marvell is in advanced talks to buy data-center optics maker Lumentum, according to Bloomberg, which explains Lumentum's premarket pop and Marvell's 10% slide; Microsoft kicked off a 10-part US dollar high-grade bond offering, because nothing says "capex in check" like a jumbo bond deal the morning after earnings; Bristol Myers, Merck and Eli Lilly delivered beat-and-raises, with Lilly lifting its FY revenue guide to $91.0-92.0 billion from $85.0-87.0 billion, while Caterpillar fell after a small revenue beat spurred AI concern; Deutsche Telekom has hit the brakes on a merger with T-Mobile US, opting against a formal bid for now partly because of pushback from its works council (and activist Elliott, which had pushed it to ditch the plan); Samsung's chip profit surged 15-fold yet the stock fell about 4% after it withheld shareholder payout plans until January and lifted FY26 capex by more than 60%; Shell announced a $5 billion buyback as record refining margins from the Iran and Russia-Ukraine wars lifted profit, while TotalEnergies' Q3 profit more than doubled; Anthropic is working with RetailBook to market its IPO shares to UK retail traders, even as banks delay offloading part of a $15 billion loan tied to an Anthropic-linked Texas data center after the state paused new projects over grid risks; Trian offered about $1.4 billion for Wendy's; and some BP board members favor a breakup, Semafor reports.

Wednesday's tentative AI rebound has run into a wall: Alphabet’s miss, Samsung’s silence on payouts and a Fed that held rates while keeping a December hike in play all landed overnight, and as Bloomberg's Jan-Patrick Barnert put it, "it’s the same spending binge, three different verdicts." Alphabet's search revenue growth slowed to 12% from 17% even as Google Cloud revenue doubled, and the company posted negative free cash flow for a second quarter running, a first since going public; Microsoft went the other way with Azure up 48% and capex below expectations, and Oracle jumped 11% on a path back to positive free cash flow. Nasdaq 100 futures dropped as much as 1.1%, with Alphabet doing about a quarter of the damage, while Russell 2000 futures rose, a split that looks a lot like the broadening trade that has dominated October.

“We are seeing the fears over AI and tech spending superseding the expectations for huge profits, especially at these elevated levels for some companies,” said Nick Twidale, chief market analyst at AT Global Markets. “As we have seen such stellar moves over the first half of the year, the expectations for Q3 are so high that anything less than excellent is a disappointment.”

Investors are jittery about tech results and are looking past the “picks and shovels” theme to find other beneficiaries, according to Rajeev De Mello, global macro portfolio manager at Gama Asset Management. “South Korea and Taiwan are exposed to these shifts resulting in poor performance for EM equities,” he said.

The rotation away from AI is no longer a one-day affair: the AI theme has not lagged this much over two quarters since the trade began, with Goldman's US Quality pair beating its Broad AI basket again this quarter.

JPM's Market Intel desk under Andrew Tyler calls Alphabet's results "a bit of a setback for the nascent re-ignition of the AI / Tech trade" and says premarket price action points to a resumption of the broadening trend of recent weeks, which, given the economic strength and robust earnings cycle, could extend. JPM's Mark Schilsky was less diplomatic, writing that Alphabet printed "a straight up miss" in which search missed buyside estimates by 2% because "pricing is declining way worse than investors were thinking" despite the strongest query growth in five years. The desk stays Tactically Bullish, would buy any dips and sees the primary risk as a spike in kinetic conflict in the Middle East, hedged via longs in crude and equity vol.

Goldman's desks see a market in transition. Richard Privorotsky writes that "the market has moved past questioning capex durability. The new question is value capture," while US sales trader Ariana Contessa saw "greenshoots of demand" in AI and semis "after 2-3 weeks of very little offense," mostly from long-only funds; activity on the floor was "a 4 on a 1-10 scale." Privorotsky's punchline: "Pain trade is hyperscalers u/p while de-risked picks and shovels start working." Goldman's Eric Sheridan kept his Buy on Alphabet but cut his price target to $385 from $435, noting capex of $51.4 billion and Cloud revenue up 103% YoY. Meanwhile, the GS vol desk notes the 62bp FOMC straddle "failed to realize" and that the market sits "closer to a dealer long gamma pocket", with today's straddle at 65bps and Friday's (post-Amazon) at 94bps. All this as hedge funds remain the most bearish in five years with the S&P sitting 1% from a record, and as Nomura's McElligott argues the pod purge will pass.

On the Fed, the 10-2 hold (Cook and Hammack wanted a hike) came as expected, but it was Warsh's press conference that moved markets: JPM's Jay Barry notes the long end sold off after Warsh revealed there will be no policy vote at one meeting in 2027 and two in 2028, while Warsh "seemingly took comfort in the evolution of financial conditions, resurrecting the narrative that long-term rates might have done the Fed’s work for them." Warsh's own line: “while overall financial conditions are tighter, I am unable and unwilling to call them tight.” Goldman still expects a "second and final hike in December," with March "also possible," and estimates September core PCE at +0.34% m/m (3.11% y/y).

The other big story this morning is out of Frankfurt: ECB President Christine Lagarde will step down on February 7, 2027, nine months before her term expires, the ECB confirmed, with the European Council to appoint a successor; Pablo Hernandez de Cos and Klaas Knot are seen as the top candidates, per Bloomberg, and European Council President Costa says the search starts today. The announcement lands hours before today's ECB decision, which is expected to hold the deposit rate at 2.5% (with a move to 2.75% in December the consensus call), and a press conference that, per Bloomberg, "will be about France more than rates." Meanwhile, euro-area 1-year inflation swaps hit their joint highest since 2023 at 3.88% after Dutch TTF gas topped €100/MWh for the first time since the 2022 energy crisis.

In Europe, the Stoxx 600 rises 0.6% to 647.81, with 426 members up and 158 down, as the region outperforms global peers after a slate of upbeat earnings; France's CAC 40 (+1.0%) leads while Spain's IBEX (-0.8%) lags on BBVA. JPM notes Defense, Homebuilders and Semis baskets are higher while Software lags. Haleon is the standout loser after pulling Centrum products from Chinese shelves, while Technip Energies and Shell lead gains on earnings. Here are the biggest European movers:

• Technip shares rise as much as 9%, the biggest gain in more than 18 months, after the engineering and technology company delivered earnings ahead of expectations and higher margins.
• Shell shares gain as much as 3.5% after the oil major reported 3Q profit that beat analyst estimates and announced a $5b share buyback.
• Aixtron shares jump as much as 9.1%. The chip-equipment company reported a large order beat in the third quarter and reiterated its full-year guidance.
• Renault shares rise as much as 3.5% after the French carmaker confirmed its financial outlook in a challenging environment.
• Air Liquide shares jump as much as 3.3%. The French maker of industrial chemicals reported 3Q revenue that beat the average analyst estimate amid a context of higher energy costs.
• Haleon shares fall as much as 14%, the most since its London listing in 2022. A change in China regulations on raw-materials imports meant it had to pull all over-the-counter Centrum vitamins and supplements from shelves there.
• Campari shares slide as much as 7.5% after the drinks maker said it’s guiding for a “marginal topline decline” in the US.
• Knorr-Bremse shares slide as much as 7.5%, to the lowest since December, as its Rail Vehicle Systems unit missed on orders, revenue and adjusted Ebit in 3Q.
• BBVA shares decline as much as 5.9% as the Spanish lender reported weak revenues in its home market, with net interest income below expectations and net income 5.5% lower than a year earlier.
• ING shares fall as much as 4.2% after the lender reported quarterly pretax profit that came in about 6% below consensus. Morgan Stanley said shares could face pressure as consensus may come down slightly for the year.
• AB InBev shares decline as much as 3.4%. Slumping beer volumes in China are the main disappointment, overshadowing an overall beat on organic sales growth in the third quarter.

Asian stocks fell as concerns over the sustainability of the AI trade resurfaced following lackluster results from Alphabet and Samsung, with the MSCI Asia Pacific Index dropping as much as 1%. South Korea’s Kospi led declines, falling as much as 3.2% before paring to a 1.2% loss, as Samsung's lack of a new shareholder return plan disappointed; Taiwan's Taiex fell 1.8% (UMC dropped as much as 9.8% on a profit miss), China's CSI 300 lost 1.2% and the chip-heavy STAR50 slid as much as 4.6%. Japan bucked the trend: the Nikkei rose about 1% to 64,581, its third straight day of gains, with Goldman's Japan desk noting Advantest (+6%, after lifting guidance and announcing a ¥280 billion buyback) made up about 65% of the index gain and the GS Japan semi basket swung 4.7% intraday; Japanese banks rose 2.5% on the "Fed hawkish hold." The ASX 200 added 0.4% while the Hang Seng was little changed. Investors also braced for the largest-ever Topix rebalancing at the close, expected to trigger around $60 billion of passive trading.

In FX, the Bloomberg Dollar Spot Index is up 0.1%, on track for its first gain in three weeks, and the DXY trades in a 102.06-102.33 range, paring some of Wednesday's post-Warsh losses. EUR/USD is down 0.1% at 1.1142 and lingers just above its year-to-date low ahead of the ECB and the Lagarde news, with options flashing bearish signals; JPM's Patrick Locke attributes yesterday's dollar weakness to the Fed's meeting-schedule change "reintroducing some institutional risk premium for USD." USD/JPY is little changed at 157.87 as the BoJ begins its two-day meeting, and the Korean won rose 0.6%, leading Asian peers. Antipodeans are lower with metals.

In rates, Treasuries hold small gains, off session highs, led by long-end tenors as investors continue to digest Wednesday's Fed announcements with support from lower oil prices; yields are 1bp-2bp lower with the 10Y around 5% (it touched 4.99% overnight) and the 2s10s curve about 1bp flatter, unwinding a small portion of Wednesday's post-FOMC twist-steepening; traders now price about an 80% chance of a December hike and 70bps of tightening by next September, down from about 78bps before the decision. The curve twisted steeper through Warsh's presser, and JPM continues to like 10s/30s steepeners. In Europe, gilts rise for a second day with the 10-year yield falling 3bps to a five-week low of 5.29% as energy prices decline and the market digests a budget that, per DB, saw Chancellor Healey "successfully buying himself more time"; bunds are 30 ticks higher into the ECB. Japan's two-year JGB auction drew firm demand with a bid-to-cover of 4.03. The week's auction cycle concludes with the $44 billion 7-year note sale at 1pm; the WI yield of 4.905% is 18bp richer than September's auction, which tailed by 0.7bp. Treasury also sells $115 billion and $110 billion of 4- and 8-week bills at 11:30am. The IG calendar is expected to pick up after the FOMC, with HSBC first out of the gate and Microsoft's 10-part deal on deck.

Market participants will be parsing PCE for “signs that higher energy costs are feeding into underlying price pressures,” wrote Lloyd Chan, strategist at MUFG Bank.

In commodities, WTI is down $1.52 at $101.26 (7:30am ET) while Brent December was down 0.8% at $114.44 earlier, after Brent briefly slipped to a $113 handle on the Semafor report that the US is involved in talks on a temporary Iran peace deal; per Semafor, if diplomacy fails the US is ready to resume combat operations shortly after the midterms, and the WSJ reported that VP Vance wrote to Iranian hardliner Mohsen Rezaei to revive talks. Iran's IRGC Navy claimed three “non-compliant” oil tankers hit naval mines and caught fire in the Strait of Hormuz over the past 24 hours. Dutch TTF gas is down about 4% after topping €100/MWh yesterday, and France says Europe is set to release 42 million barrels of oil. Spot gold is down 1% at the bottom of a $4,016-4,069 range, silver is down 2.6% and LME copper is softer after hitting resistance even as Chinese import demand hit a record.

US economic data slate includes initial and continuing jobless claims, Q3 advance GDP, GDP price index and core PCE q/q, and September personal income, spending, PCE and core PCE (8:30am). There are no Fed speakers scheduled; Treasury auctions $44 billion of 7-year notes at 1pm.

Corporate events: Eli Lilly, Caterpillar, Mastercard, Merck, Bristol-Myers Squibb, Linde, Altria, ICE and Cheniere report before the bell; Amazon, Intel, Starbucks, Coinbase, Sandisk, Gilead, Reddit and Roblox report after the close. The ECB announces its decision at 9:15am ET, followed by Lagarde's press conference.

Market Snapshot

Top Overnight News

• A global rally in technology shares stalled after disappointing earnings from two industry heavyweights revived doubts over whether billions of dollars in artificial intelligence spending will deliver sufficient returns. (BBG)
• Alphabet fell 10% in postmarket trading as its search-related revenue growth slowed to 12% from 17% in the previous quarter, even though Google Cloud’s revenue doubled; it posted negative free cash flow for a second quarter running, a first since going public. (BBG)
• Samsung’s chip profits surged 15-fold, yet the stock fell about 4% in Seoul because it withheld plans for shareholder payouts until January, a day after SK Hynix’s $45 billion payout. (BBG)
• Microsoft shares rose in extended trading after first-quarter results beat expectations on key metrics, including Azure growth of 48%, with capital spending below expectations; the company has since kicked off a 10-part US dollar high-grade bond offering. (BBG)
• ServiceNow tumbled 18.1% in postmarket trading after its forecast for fourth-quarter current remaining performance obligation fell short of the average analyst estimate. (BBG)
• European Central Bank President Christine Lagarde informed the Governing Council and European Council President António Costa that she will resign effective February 7, 2027; Costa says the EU will start the search for a new ECB president today. (BBG)
• The Trump administration is involved in ongoing negotiations centered around a temporary peace deal with Iran; if diplomacy fails, the US is ready to resume combat operations shortly after the midterms. (Semafor/BBG)
• Iran’s IRGC Navy claims three “non-compliant” oil tankers hit naval mines and caught fire in the Strait of Hormuz over the past 24 hours, the semi-official Fars news agency reports. (BBG)
• Europe is set to release 42 million barrels of oil, France says. (BBG)
• Shell announced one of its highest-ever share buybacks, $5 billion, as the Iran war and the Russia-Ukraine conflict lead to record margins for its oil-refining business. (BBG)
• DoorDash to buy Instacart for $65 a share in cash and stock, and plans to use debt financing to help fund the $17 billion acquisition. (BBG)
• Marvell Technology is in advanced talks to buy data-center optics maker Lumentum, according to people familiar with the matter. (BBG)
• Deutsche Telekom has hit the brakes on a merger with T-Mobile US, opting against a formal bid for now partly because of pushback from its works council. (BBG)
• Banks are delaying plans to offload part of a $15 billion loan to fund a data center tied to Anthropic in Texas, after the state put a hold on new projects while assessing risks to its power grid. (BBG)
• Traders are pricing a roughly 80% possibility that the Fed will deliver a 25bps hike in December, receding slightly from before Wednesday’s decision; by September they price a total of 70bps of tightening, down from around 78bps. (BBG)
• The US placed an effective ban on imports from Chinese genomics powerhouse BGI Group and two related entities under the forced-labor law. (BBG)
• US House Democrats demand President Trump preserve conversations with Grok and other AI bots: Politico
• US Department of Agriculture confirmed New World Screwworm in Arizona. (Newsquawk)
• BofA total card spending rose 6.0% Y/Y in the week to 24 October (prev. +4.9%), with spending growth among lower-income households consistently outpacing that of higher-income households over recent weeks. (Newsquawk)
• China names Zhang Shengmin as new Politburo member and will hold its party congress in Beijing in the second half of 2027. (BBG)
• Goldman expects the Fed's December hike to be the last, with March "also possible"; GS estimates September core PCE at +0.34% m/m (3.11% y/y). (GS)
• JPM's Market Intel desk stays Tactically Bullish, would buy dips, and sees the primary risk as a spike in kinetic conflict in the Middle East, hedged via longs in crude and equity vol. (JPM)

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were ultimately mixed as the region reflected on recent key events, including the FOMC rate decision and several big tech earnings. ASX 200 was kept afloat as strength in real estate, energy, financials and utilities atoned for the losses in the tech, consumer and mining sectors, but with gains capped amid a lack of fresh pertinent drivers. Nikkei 225 was choppy, briefly wiping out its early gains, before rebounding later in the session, with some caution seen as the BoJ kick-started its 2-day policy meeting. Meanwhile, attention was also on the largest-ever Topix rebalancing, which is expected to trigger around USD 60bln in passive trading at Thursday's close, with the reshuffle affecting more than 700 stocks and involving additions, deletions and free-float weight adjustments. KOSPI underperformed with index heavyweight Samsung Electronics pressured following its earnings results, in which it reported Q3 net income rose by more than 500% Y/Y to KRW 75.2tln, but failed to meet the lofty expectations. Hang Seng and Shanghai Comp were somewhat varied as participants digested a deluge of earnings, despite another firm liquidity effort by the PBoC, which continued with its CNY 1tln-plus open market operations.

Top Asian News

• China is to hold a party congress in Beijing in 2027.

European bourses are broadly firmer to start Thursday’s trade, with it being the busiest earnings day for Q3 in Europe. France’s CAC 40 (+1.0%) leads while the IBEX (-0.8%) lags. Outside of earnings (see more below), a modest boost across the equity space was seen following a Semafor report stating that the US administration is reportedly pursuing negotiations for a temporary peace agreement with Iran, although significant obstacles remain. Starting with earnings in South Korea for Samsung Electronics (-4.1%), its chip profit surged 15-fold Y/Y, driven by strong AI demand, but shares declined as investors were disappointed by the absence of new shareholder-return plans. To add, the chipmaker plans to increase FY26 CAPEX by more than 60% to KRW 84.4tln, after selling out of high-end chips for 2027. Moving to European earnings: STMicro +1.1%, Q3 metrics were mixed but its Q4 revenue guidance beat expectations (USD 4.15bln vs exp. USD 4.11bln); BBVA -5.2%, net income beat however, the metric missed for the Spanish region; ING -3.2%, metrics missed consensus across the board and it plans 400 job cuts; Shell +3.0%, adj. profit beat and announced a USD 5bln share buyback programme; Lloyds -4.9%, PBT beat estimates but disappointed investors by not lifting guidance. US equity futures are mixed, with clear underperformance in the NQ following disappointing Alphabet (-10.2%) pre-market earnings, in which EPS and revenue missed expectations, resulting in shares slumping pre-market. On the other hand, Microsoft (+3.6%) is higher pre-market after stronger-than-expected earnings and revenue, driven by robust Azure cloud growth and AI demand, alongside an upbeat cloud outlook and continued positive free cash flow. Alphabet (GOOGL) Q3 2026 (USD): EPS 2.12 (exp. 3.03), Rev. 127.6bln (exp. 127.91bln), Oper. income 40.58bln (exp. 43.16bln), Google Services rev. 96.30bln (exp. 98.4bln), Google Cloud rev. 30.71bln (exp. 29.1bln), Google Search & other rev. 63.35bln (exp. 64.85bln). Microsoft (MSFT) Q1 2027 (USD): EPS 4.92 (exp. 4.72), Rev. 92.3bln (exp. 90.6bln), Oper. income 45.9bln (exp. 44.1bln), Net income 36.6bln (exp. 35.1bln), Cloud rev. 63.9bln (exp. 61.62bln).

FX

• DXY is marginally firmer, but has slipped off best levels, and trades within a 102.06 to 102.33 range, paring some of Wednesday's losses, which came after Fed Chair Warsh's press conference lacked hawkish surprises; the Fed held rates as expected, with Hammack and Cook dissenting in favour of a 25bps hike. Focus turns to a busy US docket, including Q3 GDP, Sep PCE and weekly Jobless Claims at 12:30GMT/08:30EDT.
• EUR/USD is lower and holds towards the bottom end of a 1.1125 to 1.1161 range ahead of the ECB at 13:15GMT/09:15EDT, where policymakers are expected to hold rates at 2.50% despite elevated energy prices and inflation concerns (Full Newsquawk Preview available).
• GBP/USD is a touch softer within a 1.3295 to 1.3336 range, after marginal gains on Wednesday following the FOMC and the Autumn Budget, where the OBR raised its 2027 inflation forecast to 3.4% (prev. 2.0%) and cut its GDP growth forecast to 1.0%. Newsflow for the UK has been quiet, and the docket ahead is light.
• USD/JPY trades in a 157.60 to 158.07 range as the BoJ kicks off its 2-day meeting, where it is expected to keep rates unchanged, with focus on its language around achieving the 2% price target. Overnight, Japanese Consumer Confidence printed 35.0 (exp. 35.1), while Tokyo CPI is due tonight.
• Antipodeans are lower, with AUD/USD at the bottom end of a 0.7031 to 0.7068 range (with losses across metals not helping) and NZD/USD in a 0.5610 to 0.5637 range. RBNZ Governor Breman said chances of a December rate hike are high, after Wednesday's surprise 4-3 vote to hold, while NZ ANZ Business Confidence rose to 52.5 (prev. 51.9). Australian Import Prices fell 1.1% Q/Q (exp. +1.3%).

Central Banks

• ECB President Lagarde to step down on 7 February 2027.
• BoC Governor Macklem said the US deficit spending is a question of political will, adding the inflation forecast is based on pass-through of fuel costs, and the estimate of the neutral rate of interest may rise, while he will have more to say on his future in due course.
• RBNZ Governor Breman said the chances of a December rate hike are high.

Fixed Income

• Fixed benchmarks in the green, benefitting from the lack of hawkish surprise from the FOMC, despite the two hawkish dissenters. Otherwise, focus this morning swiftly returned to geopolitics, amid VP Vance’s mediation efforts; however, a recent Semafor report poured cold water on Vance’s efforts, though with current US focus on mediation, while strikes remain an option post-midterms.
• USTs just off best in 105-26 to 106-07 parameters, firmer by around 10 ticks as things stand.
• Bunds firmer by 30 ticks, holding at the upper end of 121.96 to 122.21 parameters into the ECB; Newsquawk preview available. This morning, action has been in tandem with USTs, and also a function of the pullback in Dutch TTF thus far, benefitting from constructive commentary from officials and energy desks.
• Gilts in-fitting, and seemingly taking the lack of hawkish surprise from the Fed as an excuse to pare back on market expectations around the BoE a touch, which are widely regarded as being too hawkish. Additionally, the lack of mistakes from Chancellor Healey during Wednesday’s budget is supportive, despite criticism from the various business bodies thereafter. Further, while he has kicked a welfare review into 2027, he continues to express an openness to cutting spending, to some degree at least. These points are supporting the space, to an 85.58 high, the highest since the final week of September.
• Japan sells JPY 2.12tln 2-year JGBs b/c 4.03 (prev. 3.89), average yield 1.905% (prev. 1.964%), Tail in price 0.014 (prev. 0.014).

Commodities

• Crude benchmarks declined overnight amid mediation hopes, after reports of a lot of back and forth between the Iranians and Americans via mediators, while US VP Vance reportedly reached out to Iranian hard-liner Rezaei in a bid to restart peace talks. Price action has been choppy in the European morning, with benchmarks bouncing off lows; WTI Dec'26 trades within a USD 100.71-102.31/bbl range, and Brent Jan'27 within a USD 109.75-111.00/bbl range, after settling at USD 102.78/bbl and USD 111.64/bbl, respectively, on Wednesday.
• Semafor reported that US President Trump is seriously considering resuming strikes on Iran shortly after the midterms if diplomacy fails, while the US remains engaged in negotiations over a temporary peace deal. Thereafter, reports suggested Iran agreed in principle to the proposed mechanisms but rejected any nuclear concessions, maintaining that nuclear negotiations can only take place after the war ends, the siege is lifted and the Strait of Hormuz reopens. Elsewhere, the White House said the US will not attack Iran before the midterm elections and that the blockade will remain in full force, while Iranian FM Araghchi said Iran could reopen Hormuz within days if its conditions are accepted. Iran's IRGC Navy claimed three tankers struck naval mines and caught fire while using an unauthorised southern route of the Strait of Hormuz, while UKMTO reported a vessel on fire 9nm north of Khasab, Oman.
• Dutch TTF is lower by around 4% and sits towards the bottom end of a EUR 96.46-99.10/MWh range. The EU Energy Commissioner said the bloc is better able to handle the crisis than in 2022, with gas use 18% below 2022 levels.
• Spot gold is lower by 1% and holds at the bottom end of a USD 4,016-4,069/oz range, after fading the post-FOMC knee-jerk uplift overnight. Spot silver is lower by some 2.6% within a USD 52.49-54.39/oz range, while platinum and palladium futures are lower by around 2.0% and 1.3%, respectively.
• Base metals are softer, with 3M LME Copper at the bottom end of a USD 14,349.00-14,506.45/t range, having stalled after its recent advances amid mixed risk sentiment. Elsewhere, Reuters reported that the LME plans to turn metal held in its Hong Kong warehouses into digital assets that can be used for financing.

Trade/Tariffs

• White House said US President Trump has directed officials to negotiate agreements with trading partners to address national security risks from imports of robotics and industrial machinery from any country.
• China condemned the US adding three Chinese firms to the Xinjiang Act list and MOFCOM called on the US to halt Xinjiang-related pressure and smear campaigns against Chinese companies, while it warned it will take firm action to safeguard its interests.
• Indian Trade Minister said a trade deal with the US will not compromise any sensitive interests of farmers or other stakeholders.

Geopolitics: Middle East

• The US administration is reportedly pursuing negotiations for a temporary peace agreement with Iran, although significant obstacles remain, according to Semafor citing an administration official. Trump confirmed VP Vance had written to Tehran to restart talks but downplayed the effort as humanitarian. The US is reportedly prepared to resume military strikes shortly after the midterm elections if diplomacy fails, pending presidential authorisation.
• US VP Vance reached out to Iranian hard-liner Rezaei in a bid to restart peace talks, according to WSJ. The outreach aims to test whether enough common ground exists to persuade Trump against ordering a short, intense strike on Iran in the coming weeks, while some US officials believe engaging Iranian hard-liners could produce a better diplomatic outcome.
• US President Trump said at a rally in Ohio that they will rename the Strait of Hormuz the Trump Strait. Trump separately commented that Iran needs help with medical supplies and that VP Vance's letter to the Iranian official was about supplies to help people, while Trump added that he didn't tell Vance to write to Iran.
• White House principal deputy press secretary Kelly told the Jerusalem Post that the US will not be attacking Iran at any time prior to the midterm elections, while she added that Iran is in very bad condition, both economically and militarily. Furthermore, she stated that the blockade will remain in full force and effect, with oil flowing in record numbers of barrels through the Strait of Hormuz.
• US reportedly warned allies to brace for possible Iran strikes, according to AP citing two diplomats.
• Iranian Foreign Minister Araghchi said Iran could reopen Hormuz within days if its conditions are accepted, according to Press TV. In later comments, Araghchi said they will continue close, sustained contacts with mediators to give diplomacy a chance.
• Iran's IRGC Navy claimed three tankers struck naval mines, exploded and caught fire while travelling through an unauthorised southern route of the Strait of Hormuz over the past 24 hours, with the vessels subsequently abandoned. The Navy also claimed to have intercepted and safely landed a US MQM-170 reconnaissance and decoy drone west of the Strait of Hormuz.
• Iranian press noted a 'baseless claim' by US CENTCOM that main transit routes through the Strait of Hormuz have been cleared of sea mines.

Geopolitics: Ukraine

• Russian President Putin's aide said Moscow is negotiating with Washington regarding lifting sanctions against the Russian Direct Investment Fund.

Geopolitics: Other

• Japan's Coast Guard said North Korea fired a suspected ballistic missile, which appeared to have landed outside of Japan's exclusive economic zone, while a media report noted that North Korea fired around 10 missiles.
• South Korea's Defence Ministry said North Korea's deployment of older weapon systems near the border appears to be performative.

Crypto

• Bitcoin slumped overnight, falling from a high of USD 81.29k to a low of USD 79.59k. The choppiness this week comes ahead of USD 11bln worth of options expiring this week.

US Event Calendar

• 8:30am: Oct. 24 Initial Jobless Claims, est. 198k, prior 194k
• 8:30am: Oct. 17 Continuing Claims, est. 1720k, prior 1728k
• 8:30am: 3Q A GDP Annualized QoQ, est. 3.2%, prior 2.2%
• 8:30am: 3Q A Personal Consumption, est. 3.4%, prior 3.8%
• 8:30am: 3Q A GDP Price Index, est. 3.2%, prior 6.1%
• 8:30am: 3Q A Core PCE Price Index QoQ, est. 2.4%, prior 3.3%
• 8:30am: Sept. Personal Income, est. 0.3%, prior 0.2%
• 8:30am: Sept. Personal Spending, est. 0.6%, prior 0.9%
• 8:30am: Sept. PCE Price Index YoY, est. 3.6%, prior 3.4%
• 8:30am: Sept. Core PCE Price Index MoM, est. 0.3%, prior 0.2%
• 8:30am: Sept. Core PCE Price Index YoY, est. 3.1%, prior 3.0%
• 11:30am: US to sell $115 billion of 4-week bills and $110 billion of 8-week bills
• 1:00pm: US to sell $44 billion of 7-year notes

Central Bank Speakers

• No Fed speakers scheduled (Fed external communications blackout per Bloomberg; JPM says Fedspeak resumes Friday)
• 9:15am: ECB rate decision; Lagarde press conference follows

DB's Jim Reid concludes the overnight wrap

A more cautious tech mood is the main theme in markets as we go to print, as underwhelming results from Alphabet and Samsung have renewed doubts about the returns on AI spending. That comes after a decent session yesterday, which saw the S&P 500 (+0.28%) close within 1% of its record high following the Fed’s on-hold decision, which also led to a steepening in the Treasury curve. In Europe, the 1yr inflation swap reached its joint highest level since 2023 ahead of today’s ECB decision as natural gas prices breached the EUR 100/MWh level. That said, oil prices are reversing much of yesterday’s rise overnight amid reports of renewed US-Iran outreach.

Starting with the tech moves, Alphabet’s shares sank by almost -10% in after-hours trading, after its Q3 sales fell just shy of analyst expectations due to disappointing Google Services revenue ($96.3bn vs $98.4bn est.). With ad revenue growing at its slowest pace in five quarters, the results raised questions about whether the payoffs will come fast enough to justify the company’s soaring capex spend. Meanwhile, Samsung Electronics is trading about -5% lower in Asia this morning after the operating profit in its chip unit came in below analysts’ optimistic expectations and the company delayed its new shareholder return plan.

Microsoft did gain about +3% in extended trading after delivering a beat in cloud computing revenue (+48% yoy vs +44% est.) but this was insufficient to brighten the overall gloomy tech mood this morning. Nasdaq futures are trading -1.20% lower, with those on the S&P 500 down -0.35%. This is a notable change from yesterday’s session, which saw an ongoing rebound in the Philly semiconductor index (+1.75%). That was led by a surge for Oracle (+10.73%) as it projected a return to positive free cash flow as well as strong gains for CoreWeave (+7.32%), though the broader Nasdaq (+0.27%) saw only a modest gain.

A more downbeat mood is also visible in most Asian markets this morning, with KOSPI (-1.20%) down after Samsung’s earnings, though it has recovered from about -3% down earlier on. Elsewhere, the CSI 300 (-1.20%) and the Shanghai Composite (-0.93%) are also trading lower. In contrast, the Nikkei (+0.66%) and the S&P/ASX 200 (+0.45%) are bucking the broader regional weakness, while the Hang Seng (+0.06%) has fluctuated between gains and losses. Tech earnings will remain in focus today with Amazon and Intel reporting.

Prior to the overnight moves, yesterday’s main event was the FOMC decision, which kept the fed funds rate at 3.75-4.00% as widely expected. The decision saw two dissents, with Governor Cook and Cleveland Fed President Hammack voting in favour of a 25bp hike. The Committee upgraded its view on economic activity from “solid” to “strong” and noted still elevated inflation, but an on-hold decision was framed as allowing for “the accumulation of more information”. Chair Warsh repeatedly returned to the theme of strong growth in the press conference and noted that “while overall financial conditions are tighter, I am unable and unwilling to call them tight”. While Warsh continued to eschew forward guidance, his comments reinforced the September SEP signal that saw the vast majority of the FOMC expect another rate hike by year-end. Our economists continue to see the Fed raising rates by 25bps in December and March. You can see their full Fed reaction here

Away from policy, Warsh laid out a planned change in the FOMC meeting schedule by next fall, saying that in 2027, one of the eight FOMC meetings will be designated for a strategy discussion with the other seven being policy decision meetings. He signaled that in 2028 this would then shift to six policy meetings and two strategy meetings.

Markets pared back Fed hike expectations following Warsh’s press conference, having gone into yesterday’s meeting pricing fully three 25bp hikes over the next year. By the close, pricing of a December hike eased from 91% to 84%, with 71bps of tightening priced by next September (-5.2 bps on the day). The Treasury curve saw a notable steepening in response. The 2yr yield ended the day -4.0bps lower at 4.70%, down from around 4.77% just before Warsh spoke. The 10yr yield closed +2.0bps higher at 5.00%, but is a couple of basis point lower again this morning. The curve steepening weighed on the dollar, with the euro yesterday (+0.26%) recovering from its 17-month low against the greenback.

Central banks will again be in focus today, with the latest ECB decision, which is also widely expected to keep rates on hold after the September hike. Virtually nothing is priced for today’s meeting though a hike is 89% priced by December. Our economists’ baseline is a final hike to 2.75% in December, with some risk of a further hike to 3% in early 2027. For today, they see the ECB focus as being on communications. With energy prices rising above the September “adverse” scenario, some hawkishness is justified, but higher yields and tighter financial conditions leave room for a balanced overall tone. See their full ECB preview here.

Ahead of the ECB meeting, European markets saw modest moves. Yields on 10yr bunds were +1.2bps higher, while those on OATs (-0.9bps) and BTPs (-0.3bps) edged lower. The bund sell-off was stronger at the front-end with the 2yr yield rising +4.1bps amid a resurgence in energy costs. Front-month European natural gas rose above the EUR 100 level for the first time since the 2022 energy crisis, settling +4.85% higher at EUR 100.72/MWh. The latest rise comes amid historically low European gas storage for this time of the year. However, the gas refilling outlook hasn’t really worsened of late so the rise of over +35% in natural gas prices so far this month appears to represent a rising risk premium heading into the winter and may well be overdone. The rise in energy put pressure on inflation pricing once again, with the 1yr euro inflation swap up +5.3bps to its joint-highest level since 2023 at 3.88%.

Rising energy prices also meant European equities struggled to gain traction. The Stoxx 600 (+0.07%), FTSE 100 (+0.07%), and CAC 40 (-0.00%) closed relatively unchanged, while Spain’s IBEX (-1.45%) registered a steeper fall. However, there were more positive moves in European credit, with IG (-4bps) and HY (-16bp) spreads tightening after their recent sell-off.

While European gas prices reached new highs, oil had a more mixed 24 hours. Brent settled +1.26% higher at $115.32/bbl yesterday but is trading -1.15% lower this morning after the WSJ reported that US Vice President Vance is engaging with Mohsen Rezaei, the secretary of Iran’s Supreme National Security Council and a key hard-liner in Iran’s regime, to revive peace negotiations. Trump sought to downplay the report last night, saying that Vance’s outreach focused on offering medical supplies to Iran. The moves come amid concerns on possible re-escalation between the US and Iran, with AP reporting yesterday evening that US officials have told allies to be prepared for renewed military action against Iran after next week’s midterm elections.

In other Middle East news, the Israeli shekel (-2.06%) was the worst performing major currency yesterday, as Prime Minister Netanyahu’s bloc achieved a slight edge over the opposition bloc in Tuesday’s election. However, there is no clear path to a governing majority, as potential outcomes include complex coalition building, a broader unity government or fresh elections. See our EM strategists’ take on the election outcome and the path ahead here.

Over in the UK, yesterday’s main focus was the first budget from Chancellor Healey. The key announcements included a 2pp additional tax on property and savings income from April, which comes on top of a 2pp rise last year and takes the basic, higher, and additional rates for property and savings income to 24%, 44%, and 49% respectively. Meanwhile, the bank tax increase was smaller than expected, from 3% to 6% for 15 months from January. Some energy reforms, like the removal of standing charges, were also proposed. Finally, Healey announced that he would lower the UK’s fiscal headroom to £15bn in 2029-30, before it rises back to £22bn in 2030-31. Our economists see the net impact of the budget as marginal, with Healey successfully buying himself more time as big questions remain regarding the UK’s long-term fiscal position. You can see our UK economists’ budget recap here. Gilts outperformed in response to the budget, with 10yr yields down -2.5bps to 5.32%.

Finally, the Bank of Canada raised its policy rate by 25bps to 2.50% as expected. The statement said that “there could be a need to increase the policy rate further” but that the Governing Council agreed to proceed carefully, noting that there was still some excess supply in the economy. In the press conference, Governor Macklem said that the hike was “needed to reduce the risk that elevated energy prices could spill over and become generalized inflation”. Canada’s 2yr yield rose by +4.0bps in response, with money markets pricing another BoC hike by January.

Looking to the day ahead, markets will continue to navigate an event-packed calendar that includes the ECB’s rate decision, US Q3 GDP, September PCE, and Eurozone October economic confidence data. Amazon, Intel, and Blue Owl are among those reporting earnings. The US will also hold an auction for $44bn of 7yr Notes. Finally, today marks the start of the EU-Canada summit.