The real "black swan" has arrived — the market is preparing for catastrophic scenarios! A textbook bubble emerges in South Korea

The latest quantitative research on earnings season released by Citigroup provides concrete evidence for this profit trend: the model predicts that 66.2% of Russell 1000 constituents will deliver positive earnings surprises (i.e., earnings exceeding market consensus expectations) and corresponding positive stock price return trajectories (i.e., Citigroup's model also predicts positive stock price return directions), significantly higher than last quarter's already strong 60.9%, reaching the highest level since Q4 2021.

The US dollar has risen 5% against the euro, with some investors expecting further strengthening. The options market has become strongly bearish on the euro, as concerns over France’s fiscal situation and political uncertainty are creating pressure points for the eurozone. Laura Matthews/Saqib Iqbal Ahmed, Reuters New York, October 8 – This fall, the dollar surged to an 18-month high, with the latest rally fueled by uncertainty across the Atlantic, prompting some investors to bet the dollar will appreciate further. Analysts say the dollar continues to receive support from high—and possibly rising—US interest rates, robust economic growth, and persistent inflation risks. However, broader pressure centered on France’s massive fiscal deficit, potentially spreading to Italy and the wider eurozone, is emerging as a primary driver for the dollar in the coming months. So far this year, the dollar has appreciated about 5% against the euro, boosting the dollar index .DXY, which measures the dollar’s strength against six major currencies, including the euro (its largest component). “The euro remains under pressure, limiting one of the main alternatives to the dollar,” said Yuuto Shinohara, Senior Investment Strategist at Mesirow Currency Management. Last week, the yield spread between French and German 10-year government bonds recorded its largest weekly increase in decades, while the Italy-Germany yield spread saw its biggest weekly surge since the pandemic. The euro EUR= was last at 1.1183, down 0.67% against the dollar. “The market is focused on countries that, due to political dysfunction, cannot restore sustainable fiscal trajectories,” said Karl Schamotta, Chief Market Strategist at Toronto’s Corpay. One concern is that the euro no longer receives much support from the European Central Bank’s hawkish signals. The ECB raised rates by 25 basis points in September—its second hike this year to counter energy-driven inflation—but the euro fell after the decision, as markets worried about the impact of future hikes on the economy. Typically, rising European bond yields support the euro, but the euro's muted response suggests investors are increasingly concerned about growth and fiscal risks. Rising energy prices could add further pressure. “Structurally, Europe is a major energy importer and is more manufacturing-dependent than the US. The impact is obvious: high energy prices will drag down the region,” said Benjamin Ford, a researcher at Macro Hive. Ford expects the euro to fall to $1.10 within the next month, nearly 2% lower than current levels. “The US medium-term outlook seems stronger, while Europe is more susceptible to shocks,” Ford said. Policy Missteps Investors are also weighing whether the ECB can continue fighting inflation without causing greater harm to already weakening economies. The eurozone inflation rate (link) exceeded expectations in September, and with energy costs surging, it may rise further in coming months, keeping pressure on the ECB to hike rates. “There’s clear asymmetric downside risk for the euro at present,” said Dan Tobon, Citi’s Head of G10 FX Strategy in New York. “One of the likeliest triggers is policy error—if the ECB overtightens at a time when markets can’t bear it.” Euro risk reversal for one-month options, which measures whether traders are paying more to hedge against euro losses than gains, hit its most bearish level since March last Friday, while the three-month indicator touched its lowest point since June 2024. Federal Reserve policymakers have signaled that inflation risks remain high, which has helped keep US Treasury yields at multi-year highs. “Yields continue to rise, and US rates have an absolute advantage over most developed markets,” Shinohara said. Federal funds futures show about an 84% chance of at least one more 25-basis-point hike by December. Although few strategists expect the dollar to surge dramatically from current levels, they note that US economic resilience, sustained high yields, and Europe’s unique risks continue to tilt the balance toward the dollar. “For now, this imbalance looks very unfavorable for Europe,” Citi’s Tobon said. (For the convenience of non-native English speakers, Reuters automates translation of its reports into several other languages. As automated translation may be flawed or lack necessary context, Reuters does not guarantee the accuracy of such translations. They are provided solely for the readers’ convenience, and Reuters accepts no liability for any damage or loss arising from use of automated translation.)