The market is grappling with a jigsaw puzzle – with US equities sitting at close to record highs, how do rising treasury yields fit into the picture? The major US indices have all recently chalked up new all-time highs, however a rebound in bond yields has thrown a curveball to stocks, which is why we have seen some hesitation creeping into equity markets. What is the bond market signalling? The rise in the 10-year treasury yield to back above 4.2% indicates a repricing of Fed rate-cutting expectations.
It is fair to say that in recent weeks the string of upside beats on jobs (NFP), CPI and retail sales data will give Jereme Powell and co. plenty to think about at the next two Fed meetings, and bond markets have reacted accordingly to the less-dovish outlook. So far, the rise in treasury yields has caused equity markets to hesitate rather than panic, though if the uptrend in benchmark yields continues, there could be some second-guessing going on about current equity market valuations.
The USD continues to be ‘flavour of the month’ in currency markets, with the ‘buck’ ably assisted by ascending bond yields. US macro data has been stacking up better compared to numbers in the UK and Eurozone, leading to expectations that the BOE and ECB will be descending faster with regards to monetary policy settings compared to the Fed. The upshot is that the Dollar Index (DXY) is back above the 104 level (104.04 as of early Asian trading hours on Wednesday), having looked like it was about to slip below the 100 level at the backend of September.
Gold has again been racking up record highs despite the rising USD and bond yields. Gold and the USD typically have an inverse correlation (historically speaking); however, both share the moniker of being a safe haven asset. Event-risk in the form of next month’s US election and ongoing geopolitical risks (e.g. Israel-Iran) mean that both assets are enjoying safe-haven buying flows due to the current market conditions. Gold is hovering around the $2750 level (during Asian trading hours Wednesday), just shy of resistance at $2752. Support lies at $2714, should a pullback occur on overbought conditions. Momentum and the fundamental outlook remain in favour of the gold market, particularly as we are on the doorstep of a US election.
China’s move to cut its LPR’s (Loan Prime Rates) looks to have supported the oil price to some degree. The WTI contract has moved back above the $70 level, though trading conditions remain choppy. Fears that Israel may strike Iran’s energy infrastructure have largely dissipated, though things could flare up again at any time. Oil price movements remain subject to Isreal-Iran headlines and as such it is tricky to trade with any sort of conviction given the uncertainties at play.
Looking ahead, US Manufacturing and Services PMI data (due Thursday, US time) will give us the next indication about whether the Fed erred by cutting rates 50bp last month or not. The US services sector has fared better than the manufacturing sector in 2024 and that trend is expected to continue. An upside surprises in either set of data (manufacturing or services) could raise the prospect of a Fed rates pause come December.
