US futures are lower, extending yesterday’s losses, as treasuries extended their recent rout sending 10Y yields surging briefly above 4.22% before retracing some of the move as traders priced in the growing probability of a red sweep. The Treasury rout has gone global, pushing interest rates across the world higher. As of 8am ET, S&P 500 futures dropped 0.3%, pointing to the first back-to-back decline in about 30 sessions for the gauge. Nasdaq 100 futures underperformed, dropping 0.4%, as tech stocks start to groan against the weight of surging rates; megacap tech all showed declines: TSLA -0.8%, GOOG -0.5%, AMZN -0.5%. The yield on 10-year Treasuries added one basis point to 4.21% after an 11 basis-point surge at the start of the week; the USD is flattish after reversing a modest earlier loss. Commodities are mixed: Oil added 0.5%, base metals are lower, and precious metals are higher: silver rises +1% to $34.5, a new 12 year high. The only macro today are the October Philly Fed and Richmond Fed reports.
In premarket trading, Philip Morris rises 2% after lifting its profit outlook amid strong sales of tobacco alternatives such as Zyn and IQOS. 3M climbed 4% after increasing the low end of its 2024 profit forecast and reporting 3Q earnings that topped analyst estimates as a push to boost productivity gained traction. Polaris tumbled 7% after the automaker lowered its full-year earnings per share and sales guidance. Here are some of the biggest US movers today:
Investors further pared paring back their expectations for Fed rate cuts after central bank officials indicated a preference for reducing rates at a slower pace after recent resilient economic data. The inflationary impact of a possible Donald Trump presidential win is also weighing, given his promised tax cuts and trade tariffs could ultimately entail higher rates.
“This is very clearly linked to trading a victory of the Republicans — and therefore to an agenda which would be much more inflationist than that of the Democrats. We’re in a market that is betting on Trump,” said Christopher Dembik, senior investment adviser at Pictet Asset Management. “The rise in yields is starting to threaten equity markets." (see more here "Wall Street Going "All-In On Trump".")
Elsewhere, exposure to the S&P 500 has reached levels that were followed by a 10% slump in the past, Citigroup Inc. strategists said. Still, despite the mounting risks, the current winning streak for US stocks ranks among the very best since 1928, according to data compiled by SentimenTrader. And even though US equities are expensive, going underweight is a tough call for investors in the environment where S&P 500 reached 47 record highs this year starting from January, said Vera Fehling, DWS Europe chief investment officer.
"If you said then: ‘things are looking quite stretched’ — you would have massively underperformed," she added. "It’s difficult to explain going into the end of such a year with a significant underweight in US equities."
European equities appear cheap by comparison and got even cheaper on Tuesday after the Stoxx 600 benchmark declined 0.8%, led by real estate and utilities sectors, which suffer when the cost of borrowing money rises. Major markets are all lower (UKX -0.6%, SX5E -0.4%, SXXP -0.7%, DAX -0.1%.) with Spain lagging. SAP is driving the tech sector to outperform after the German software giant delivered a beat on several key metrics in the third quarter and boosted some elements of its guidance for the full year. ING shares slip as Barclays downgraded the bank to equal-weight from overweight. Here are the most notable European movers:
So far about 47% of MSCI Europe companies reported results below expectations while only 27% delivered beats, according to data compiled by Bloomberg Intelligence. L’Oreal is set to report earnings later today, with analysts watching the impact of Chinese economic weakness on the stock.
Earlier in the session, Asian stocks fell on Tuesday, dragged by weakness in the technology and financial sectors, amid lower expectations for Federal Reserve interest-rate cuts. The MSCI Asia Pacific Index fell as much as 1.1%, with TSMC and Commonwealth Bank of Australia among the biggest drags. The decline follows comments from some US central bank officials signaling they favor a slower pace of rate reductions. Australian and Korean benchmarks were among the biggest decliners. Japanese stocks slid as uncertainty surrounding the Oct. 27 general election weighed on local markets. Stocks in India were also lower, led by automakers amid lackluster trading debut for Hyundai Motor Co.’s local unit. Stocks gained in Hong Kong after declining on Monday. China’s commitment to delivering stimulus is an ongoing focal point for traders in addition to the US presidential vote, which is about two weeks away. Focus is also turning to earnings performance this results season, which could help determine the near-term path for the MSCI Asia gauge.
In FX, the Bloomberg Dollar Spot Index was flat after rallying 0.4% on Monday. One-month implied volatility in BBDXY stands above 9.61, fresh cycle high; risk reversals on the tenor steady around 0.5 vol The Australian and New Zealand dollars outperformed their Group-of-10 peers as higher bond yields and gains in Chinese equities boosted sentiment.
In rates, treasuries fell for a second day, adding to Monday’s steep selloff as Fed officials indicated a preference for reducing rates at a slower pace. US 10-year yields rise 2 bps, topping 4.2% for the first time since July. Oil also continues to rise, adding to upward pressure on yields from shifting Fed policy outlook and focus on next month’s US presidential election and fiscal outlook. European government bond are also lower, with UK and German 10-year borrowing costs rising 3 bps and 4 bps respectively. Italy 10-year is ~3bp cheaper vs Treasuries, underperforming amid 7- and 30-year bond syndication. Treasury auctions this week include Wednesday’s $13b 20-year bond reopening and a $24b 5-year TIPS sale Thursday.
In commodities, oil prices reversed course, with WTI now up 0.5% at $71 a barrel. Spot gold rises $13 to just below Monday’s record high. Gold rose - approaching Monday’s record high - with haven demand coming from traders focused on the conflict in the Middle East and the looming US vote. Silver jumped 1% to hit $34.50, a new 12 year high.
US economic data calendar includes October Philadelphia Fed non-manufacturing activity (8:30am) and Richmond Fed manufacturing index (10am); Fed’s Harker is scheduled to speak at 10am
Market Snapshot
S&P 500 futures down 0.3% to 5,877.00
Brent Futures down 0.5% to $73.95/bbl
Gold spot up 0.6% to $2,736.07
US Dollar Index down 0.10% to 103.90
Top Overnight News
A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mixed with participants somewhat cautious following the mostly negative bias stateside amid a lack of major catalysts, ongoing geopolitical tensions in the Middle East and a higher yield environment. ASX 200 retreated from the open with Real Estate and Healthcare leading the broad downturn seen across sectors. Nikkei 225 was pressured following its recent failure to hold on to the 39,000 level despite a weaker currency. Hang Seng and Shanghai Comp shrugged off early weakness to trade in the green albeit with price action choppy as the attention turned to earnings updates, while the PBoC conducted its first swap operation involving securities brokerages, funds and insurance companies worth CNY 50bln on Monday.
Top Asian News
European bourses, Stoxx 600 (-0.2%) began the session mostly, but modestly on the backfoot, (ex-DAX 40 & Euro Stoxx 50; benefiting from post-earning strength in SAP) and have traded in a busy range throughout the morning; in recent trade, indicies are now broadly in the red, due to geopolitical updates out of Israel. European sectors hold a strong negative bias; Tech is by far and away the clear outperformer, lifted by post-earning strength in SAP (+5.4%). Real Estate is towards the foot of the pile, given the relatively higher yield environment. US Equity Futures (ES -0.1%, NQ -0.2%, RTY -0.4%) are modestly in the red to varying degrees and with slight underperformance in the RTY, which was subject to hefty selling pressure in the prior session. ASML (ASML NA) CEO says 2025 will be a growth year, the long term will still see growth. "Not everyone is surfing the AI wave". "What we have seen in the last few months is people beginning to push the breaks". "China demand is for mainstream chips, older generations of technology". "Normal Chinese demand is for 20-25% of ASML's sales, expect it to return to those levels". "China may be able to produce some 5 or 3 nanometre chips, but few, using older tech". It is clear the US will push for more export restrictions to China. "The Netherlands and Europe will start to discuss with China export restrictions make sense"
Top European News
FX
Fixed Income
Commodities
Geopolitics: Middle East
Geopolitics: Other
US Event Calendar
Central Bank Speakers
DB's Jim Reid concludes the overnight wrap
Only two weeks until the big day. One that I've been looking forward to for what seems an exceptionally long time. Yes, the kids will go back to school after an extended 2-week half-term. As predicted last week my wife was already fed up with them last night after one day of holiday yesterday. The twins are so noisy! I'm off to Center Parcs with them all for a long weekend on Friday so I won't be spared.
With two weeks to go today until the election, markets have started the week a bit more nervously than during the last 6 where the the S&P 500 has gone up each week for only the second time since the pandemic. Yesterday it started the week -0.18% but with bigger sell-offs elsewhere and extending into the Asian session this morning. The sell-off was much more pronounced among sovereign bonds though, with the 10yr Treasury yield (+11.3bps) reaching its highest level (4.20%) since late July, shortly before the weak payroll report, the Japanese mini-crash and the associated brief market turmoil. Moreover, the move was primarily driven by higher real yields, with the 10yr real yield (+10.2bps) moving up to 1.88%, which is its highest level since the end of July. Overnight, 10yr USTs are another +1.4bps higher as we go to print.
There were several factors behind the move but none that particularly dominated yesterday. In the background there has been a rising concern about debts and deficits, particularly ahead of the US election. Indeed, the IMF pointed out in their recent Fiscal Monitor that global public debt is forecast to exceed $100 trillion this year, and rise further in the medium term, so this is a growing issue as policymakers gather for the IMF/World Bank Annual Meetings in Washington this week. Moreover, our US economists have pointed out that irrespective of who wins the presidency or congress, they could see deficits in the 7-9% area over 2026-28, which is a level unprecedented outside of major wars or massive economic shocks like the GFC and Covid-19.
In addition to the long-end moves, expectations of Fed easing continue to drift lower, with Fed funds pricing for next March (+8.0bps to 4.05%) moving back above 4% for the first time since the start of August, after having fallen to below 3.4% in late September. This came as Fed speakers continued to express preference for gradual easing moving forward, with Kansas City President Schmid favouring “modest” reductions while Minneapolis Fed President Kashkari was “forecasting some more modest cuts”.
Another factor behind the bond selloff were growing inflation risks, and yesterday saw Brent crude oil prices (+1.68%) pick up again to $74.29/bbl. That comes amidst growing focus on Israel’s expected retaliation against Iran’s missile strikes earlier this month, which is still yet to materialise. But oil prices were reacting to several weekend developments, including the drone strike on the private home of Israeli PM Netanyahu that we mentioned yesterday. Indeed, foreign minister Israel Katz said over the weekend that there was “no doubt that another red line has been crossed here”. Meanwhile, although the classic safe haven of gold (-0.06%) closed marginally lower, after posting four consecutive session ATHs, this morning its +0.43% higher as I type and back at what would be record closing levels again.
Over in Europe, the bond selloff was even more aggressive, with yields on 10yr bunds (+9.9bps), OATs (+12.1bps) and BTPs (+15.3bps) all seeing large moves higher. In part, that’s because investors have pared back their expectations for a larger 50bp rate cut at the ECB’s December meeting, and we had a lot of commentary from several officials to digest as well. For instance, Lithuania’s Simkus said that he didn’t see the need for cuts bigger than 25bps, and Slovakia’s Kazimir said that the December meeting was “wide open”.
Back to the US election, the general consensus across polls, betting averages and forecasting models is that Trump has gained ground on Harris, but the race is still within the margin of error across the key battleground states. Now clearly that could change, but from a market perspective, the Trump bump has meant that beneficiaries of the “Trump trade” have continued to do well in recent sessions. Most notably, Trump Media & Technology Group (+5.81%) was up to its highest since July yesterday just after Biden pulled out of the Presidential race.
Returning to yesterday, equities struggled, particularly as bond yields kept on rising. The S&P 500 (-0.18%) posted a modest decline, but it was a broad-based one, with the equal weighted version of the index seeing its worst day in more than six weeks (-0.85%). Small-caps struggled in particular as the Russell 2000 (-1.60%) saw its worst day since early September. Information technology (+0.93%) was the only major sector within the S&P 500 to post a gain. The Mag-7 (+0.64%) advanced as Nvidia (+4.14%) hit a new record high, while the NASDAQ (+0.27%) moved to within half a percent of its all-time high from July. Over in Europe, markets closed around the intra-day lows of the US session, with the STOXX 600 (-0.66%) and the DAX (-1.00%) both losing significant ground.
Whilst there were several short-term catalysts for the selloff, it’s also worth bearing in mind that the market performance has been pretty incredible over recent months. Only last week, we saw US IG credit spreads reach their tightest level since 2005, and the S&P 500 is up for 37 of the last 51 weeks, which is a joint record back to 1989. This means that traditional valuation metrics are now looking increasingly stretched by historic standards, at a time when geopolitical risks are elevated and the soft landing is now increasingly priced in as the likely outcome, so it should in theory get harder from here. Henry took a look at some of these reasons for caution yesterday here.
Asian equity markets are mostly lower this morning. The S&P/ASX 200 (-1.68%) is the biggest underperformer in the region, followed by the Nikkei (-1.43%), the Topix (-1.14%), and the KOSPI (-1.17%). However, Chinese equities are defying the regional trend, with the Hang Seng (+0.41%) and the CSI 300 (+0.47%) posting gains. S&P 500 (-0.18%) and NASDAQ 100 (-0.26%) futures are edging lower. Aussie 10yr yields are +14.5bps with JGBs +2.6bps.
Early morning data showed that South Korea’s producer prices declined by -0.2% in September, matching the decline from the previous month.
There was very little data to speak of yesterday, although we did get the Conference Board’s leading index from the US. That showed a decline of -0.5% in September (vs. -0.3% expected). In level terms, that also left the index at its lowest level since May 2016. The monthly reading hasn’t been positive since February 2022 so the release has lost some of its shock value recently given how well growth as performed over the last few quarters. Separately in Germany, producer prices remained in deflationary territory in September, at -1.4% year-on-year (vs. -1.1% expected).
To the day ahead now, and central bank speakers include ECB President Lagarde, the ECB’s Centeno, Knot, Holzmann, Villeroy, Rehn and Panetta, the Fed’s Harker, BoE Governor Bailey, and the BoE’s Greene and Breeden. Otherwise, earnings releases include General Electric, General Motors and Verizon.
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