But yesterday, both pushed higher initially yesterday, weighing on major US and European indices, although US Treasury yields later retreated following a strong 30-year bond auction. The Stoxx 600 tested its 200-DMA, with an increasing likelihood of extending losses below this level, while US tech-heavy indices couldn’t hold up this time, as reports that OpenAI’s annualised revenue run rate was lower than previously indicated hit AI-related stocks. The Philadelphia Semiconductor Index fell more than 3%, while the Nasdaq 100 retreated from the record highs reached earlier this week.

Oil is lower and equities look better bid this Friday. With a relatively light calendar, aside from US consumer sentiment and Canadian employment data, investors may spend the last trading day of the week without a major change of direction.

The week ahead

Because I will be travelling next week, I wanted to jump directly into what will matter while I’m away, because next week brings two big tests for market appetite: US inflation and the start of the third-quarter earnings season. On Wednesday, the US will release its September CPI report, followed by producer prices and retail sales on Thursday.

Although the most recent jobs data hinted at some weakness in payroll growth and wages, inflation remains the main source of pressure on Federal Reserve (Fed) expectations.

Energy inflation is likely to remain elevated — oil and gas prices were volatile during September — but what will matter for Fed expectations is whether inflationary pressure is broadening beyond energy, and whether consumers keep spending despite higher borrowing costs. Sticky inflation combined with strong consumption could strengthen the Fed hawks’ hand and keep yields under upward pressure.

Softer inflation with resilient spending would be a more comfortable combination for equities. It would not necessarily change expectations that the Fed should hike rates one more time this year to temper inflationary pressures — provided growth and the jobs market remain healthy enough to allow it. But it could reduce the urgency of raising rates and buy the Fed time before its next move. And timing is everything, with another rate hike before the midterm elections likely to be politically sensitive. Oh no...

Across the Atlantic, euro area inflation numbers will also be closely monitored by euro investors, but they will mostly be updates to the preliminary estimates. We will therefore stay with the inflation theme, potentially keeping the ECB hawks in charge of the market.

Yet, of course, the euro area has started to face a bigger, more urgent problem in the short run. Debt tensions appear to be spreading beyond France. We see that through widening yield spreads between Germany and several other countries, including Italy, Spain, Portugal and Greece. Rising yields will tighten financial conditions across euro area economies without the ECB raising rates. Further turmoil could therefore soften ECB rate-hike expectations without, however, increasing appetite for the euro.

Moving forward, the distinction between why yields are rising will gain importance in this chaotic environment. US yields have been rising partly on the back of stronger growth expectations. Yes, yes, if you are new to these updates, we have frequently discussed how long-term inflation expectations remain relatively contained near 2.3% while real yields are rising.

Strong growth expectations linked to AI investment and expansionary fiscal policy help explain that move, alongside concerns about debt supply and the compensation investors demand to hold long-term bonds. In Europe, concerns about the fiscal outlook are an additional source of upward pressure on yields. That does not have the same positive impact on appetite for the euro.

So, for the coming days, the rule of thumb is: if yields rise because a central bank can hike rates and economic fundamentals can withstand those hikes, that tends to support the currency. If, however, yields rise because of turmoil and a loss of confidence, don’t be fooled by the higher return. In practical terms, that means being cautious before rebuilding a long position in the single currency.

On the corporate calendar, US banks will kick off the earnings dance next week. Remember, banks on both sides of the Atlantic were among the biggest contributors to strong Q2 earnings growth: resilient consumer spending, massive AI investment — including bond and equity issuance to help companies finance the AI buildout — and volatile markets helped banks print strong results.

A few weeks ago, some banks warned that earnings growth could slow, while others reassured investors that they were on track for another strong quarter. So it will be interesting to see whether banks continue to sail with the wind at their backs, and whether European banks — due to report in the following weeks — can calm investors’ nerves amid mounting euro area debt worries.

Besides banks, TSMC and ASML results will be worth watching to confirm that AI demand remains strong and there are no signs of a slowdown among the Big Tech buddies as we head into the heart of earnings season.

But good results may not suffice to boost stock prices: Samsung flagged an almost ninefold increase in quarterly operating profit, and TSMC’s third-quarter sales jumped 51%, yet their shares fell on Thursday. But still, their contribution to earnings growth could give investors a reason to stay bullish in equities.

Broadly, expectations for Q3 earnings are strong. Analysts expect third-quarter earnings to grow around 30% for the S&P500 and 19% for the European Stoxx 600 compared with a year ago.

We know there is a catch: excluding energy, Europe’s expected growth falls to around 10%. Higher energy prices are boosting producers’ profits while squeezing other businesses and their customers. And excluding technology, expected US earnings growth would also roughly halve, falling to 7.4% if both energy and technology were left out.

This means that headline earnings growth relies heavily on a few sectors, while a relatively small number of companies continue to shoulder much of the major indices’ performance. But that concentration did not prevent major indices from advancing to fresh records last quarter.

So I will say this before I go: the BIG consensus for the coming earnings season is that if headline earnings growth remains strong enough, investors can postpone worrying about rising yields a little longer. The broader that growth is, the more reassuring it will be for global risk appetite. But with rising energy and borrowing costs, broader growth may not be on the menu du saison.