News & analysis
Deutsche Bank Q3 Review: Commodities and Yen Lead, Government Bonds and French Assets Lag
Energy, metals and agricultural commodities rose across the board while sovereign bonds and French assets fell back, leaving inflation and the pace of further rate hikes as the dividing line for the next quarter.
Key points
- Brent crude rose 42.0% and European natural gas futures 66.6% in the quarter, with metals and agricultural commodities also higher.
- The yen was the top-performing G10 currency, up 3.3% against the dollar, after US-Japan intervention in August and a Bank of Japan rate hike in September.
- Sovereign bonds and French assets were the quarter's main laggards, with the French 10-year spread over German bunds widening 48bps to 127bps, the biggest quarterly widening since 2011.
Deutsche Bank's review of the third quarter found commodities gaining across the board while sovereign bonds and French assets lost ground, with Brent crude up 42.0% and European natural gas futures up 66.6%.
Brent's 42.0% advance came amid the re-escalation of the US-Iran conflict, and European natural gas futures rose 66.6%. Metals also gained, with gold up 3.7%, silver 3.1% and copper 6.9%. Agricultural commodities posted some of the quarter's largest moves: wheat rose 16.3%, corn 21.3% and sugar 22.9%.
The yen was the best-performing G10 currency, up 3.3% against the dollar, after the US and Japan intervened to support it at the start of August and the Bank of Japan delivered a 25bp rate hike in September.
Sovereign bonds were the weakest major asset class in the review. Deutsche Bank attributed the losses to higher inflation, resilient growth and further rate hikes, which pushed US Treasuries and euro sovereigns lower in total-return terms.
French assets were a particular source of weakness. The CAC 40 fell in total-return terms, and the spread of French 10-year yields over German bunds widened 48bps to 127bps, the biggest quarterly widening since 2011, during the euro crisis.
The review's own explanation ties the bond and French underperformance to the same combination of sticky inflation, resilient growth and additional rate hikes. Continued upside inflation surprises and further tightening would be the condition that extends that pressure; a durable cooling in inflation or a halt to additional hikes would be what eases it. That reading is an inference from the review's stated drivers rather than a forecast it published.
