Bond woes spill over into equities

0:28Good morning from the Financial Times. need to start your day.

0:39Google will not have to break itself up. A U.S. federal judge ruled yesterday that the Department of Justice overreached when it tried to force Google to divest key assets like its web browser Chrome. The same judge last year ruled that Google had created an illegal monopoly, and the DOJ argued the company would have to sell parts of its business to loosen its grip on online search. The judge yesterday did say that Google was barred from entering into exclusive contracts with wireless carriers, browser developers, and device manufacturers, but he did not ban all payments from Google to promote its products.

1:17The company will also have to share more information with certain competitors, like user interaction data. Investors liked all this. Google's parent company, Alphabet, saw its share price jump nearly 8 % in after-hours trading yesterday.

1:37A sell-off in government bonds spilled into the equity markets on Tuesday. In the gilt market, long-term borrowing costs in the UK hit their highest level since 1998, and the S &P 500 fell as much as 1 % yesterday. Just a messy day in global markets all around. The FT senior markets correspondent Ian Smith has been covering this mess and is here to help me make sense of it. Hi, Ian. Hey there. All right, so let's start with UK markets. They took quite the hit on Tuesday. Can you explain what happened? So on Tuesday, we saw further weakness in the UK government bond market, the gilts market. Also in the UK, we saw the pound fall, more than 1%.

2:16So you saw this kind of chunky move as people grew concerned again about what the rise in borrowing costs mean for the UK's public finances. And what does it mean? What's going on there? What it does is it reduces the wiggle room that the Chancellor, Rachel Reeves, has against her self-imposed fiscal rules. That wiggle room that she had before she would have to borrow more to kind of balance the books has reduced from$10 billion at the time of the spring statement to around half that now at current yield levels. That has put more pressure on the government in the run-up to the autumn budget to come through with fresh tax rises or spending cuts to help keep within the fiscal adjustment and borrowing projections that they've promised.

3:00So this is what's going on in the UK. What's going on elsewhere? So the key thing to stress here is that UK borrowing costs are rising, but so are global borrowing costs. You've seen similar moves in UK gilts that you've seen in German bunds and in US treasuries in recent sessions. Long-term borrowing costs in particular are moving higher as you see that steepening in the so-called government yield curve. So long-term market interest rates rising faster than short-term market interest rates. That's due to a number of things, including this kind of record level of government borrowing that we're seeing, as well as some changes in demand where pension funds and life insurers, traditional buyers of the debt, are reducing how much they're buying of that very long-dated issuance.

3:42In the U.S., you've seen that encouraged by Donald Trump's attacks on Federal Reserve independence. So you're seeing this kind of pressure from bond markets globally, and those with the worst debt dynamics are feeling it hardest. But even, you know, when we talk about uncertain U.S. policy, that's been going on for a while. You know, you mentioned Federal Reserve independence. That's been going on for most of the year. What has spooked equities investors now? What some investors are saying is that this bond market sell-off is reaching the point where it's disturbing equity prices. And we saw that on Tuesday when US stocks opened lower as some of that concern in global bond markets filtered into stock markets.

4:22There are other reasons why US stocks are weaker, such as concerns over high valuations, some concerns about like AI growth and how much it can continue at the levels that we've seen. But there's definitely this theme within markets where people are questioning how high can government borrowing costs go, which means how low can bond prices fall before they start to really disturb equity sentiment. Do you see this as part of a worrying trend, both the bond sell-off and the equity sell-off, or just part of the normal ebb and flow of the markets? I think we shouldn't overstress some of these moves.

4:58The moves that we've seen this week have been contained. But if you start to see more of these ripple effects across currency markets and across stock markets from the fiscal concerns that people have over the record levels of sovereign borrowing in rich nations, that could start to become a more prominent concern for investors. But we have to set this against a backdrop where US stocks have recently been at record highs. So have UK stocks and other stock markets. So it is not like we're seeing a massive kind of market sell-off. What we're seeing is some mounting concerns over fiscal positions of certain indebted governments and whether those will be addressed in the short term.

5:39That's the FT's Ian Smith. Thank you so much, Ian. Thank you.

5:49Eurozone inflation rose above the European Central Bank's 2 % target in August. It's the first time that's happened since April. Data this week showed inflation rose to 2.1 % last month. Now, last month's rise was driven by food, alcohol, and tobacco, though core inflation, which strips out the volatile food and energy components, was also elevated at 2.3 % for the fourth straight month. The European Central Bank meets next week, and these figures make investors and economists think that policymakers are going to keep rates on hold.

6:29European banks want to be able to move money across the continent without cumbersome national barriers. That's according to a new report. That report also claims that more than 200 billion euros have been trapped by country restrictions. Martin Arnold is our financial regulation editor. He's here to tell us more about Europe's new push for cross-border banking. Hey, Martin. Hi, Mark. Good to speak to you. Good to have you. So, you know, Martin, just start me off with this report. It's from the Association for Financial Markets in Europe. And, you know, what are European banks complaining about?

7:04So this is not a new complaint, but I think it's becoming more of an urgent one from the European banks. and they are increasingly perturbed. So the 20 countries that all share the euro, they're supposed to have an integrated banking market, but they don't really because countries still have lots of national hurdles that trap, as you said, hundreds of billions of euros of capital and liquidity, according to these banks. And they're also, this patchwork of different national rules means that the regulators are too slow to approve mergers between Eurozone banks, and they also mean that there's a lack of efficiency for the banks to try and achieve truly harmonized cross-border banking services.

7:52All right, so let's walk through this a bit. What's holding up the cash, and what are these other problems that banks face with mergers and regulatory differences? So the way that one banking executive explained it to me, Mark, is if you think about the difference between the Eurozone, where you've got 20 different countries, and the US, where you've got 50 different states, if you've got a Eurozone banking license, you can have subsidiaries across the Eurozone in different countries. Say you're a German bank, but you'll have a subsidiary in France and Italy and Spain. Well, each of those subsidiaries will have to hold capital and a certain amount of liquidity as if they were a standalone entity rather than treating all of the group as a whole, which would be much more efficient as far as that bank is concerned and allow them to move the capital and liquidity around between different countries.

8:44Say that they raise lots of deposits in Spain, but they want to actually do more lending in Italy, that would be easy because that's what you do if you're a US bank. You raise lots of deposits, say, in New York, and you use them to lend lots of money in Chicago. And there's no problem with that. But in Europe, it's very, very hard. And that's what they're complaining about. Martin, why is this all coming up now? As you said, these complaints are not new. Yeah, that's a great question. There's two reasons for this. One is, if you look at what's happening in the US under Donald Trump, there is a real drive to make financial regulation much more bank-friendly, to ease a lot of the regulations there.

9:28There's similar pressures in the UK, whereas in the EU, there's been much less of this. So I think the Eurozone banks are worried they're going to be left behind. There's also a concern politically in Brussels and in Frankfurt that there is a slowing Eurozone economy. And one of the things that they're looking at is whether they could harmonize more the financial sector in Europe to generate more investment, generate more funding for companies. And so the banks see a real opportunity here to drive through some of these objectives that they've had for many years. And they're hoping now that the time is ripe for them to actually achieve some real results on this.

10:14So how do you see this playing out in the next while? Is there anything in particular that you're looking out for that would signal changes? Yeah. So there are a couple of things that I have my eye on in particular. One is at the European regulators. So for instance, European Central Bank, but also other European regulators are conducting reviews of banking supervision and banking rules. So we'll see what comes out of that. I don't think there'll be anything radical, but there could be something in there that could be positive for the banks. And then at the Brussels level, the EU level, they're going to be doing a big review of competitiveness.

10:50And I think that a lot of these issues that the banks are raising will play into that, and they'll be hoping to see some real traction in that review. Martin Arnold is the FT's financial regulation editor. Thanks, Martin. Thanks, Mark.

11:09Before we go, I want to give you a heads up that I already have my suitcase packed, and I'm ready to go to the FT Weekend Festival in London this Saturday. I'll be there with a bunch of our other journalists, and we're going to talk politics, podcasts, and what it's like being in news during this very unique time in history. I'll be speaking first thing in the morning, so make sure to swing by the Experiences tent and say hello. And oh yeah, we're offering 10 % off your FT Weekend Fest ticket using a promo code that you can find in our show notes. I hope to see you there. This has been your daily FT News Briefing.

11:42Check back tomorrow for the latest business news.

11:51Thank you.

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