(October 24): Equities in Asia were primed for a pullback, while Treasury yields pushed the dollar higher as traders scaled back bets on Federal Reserve cuts.
Futures contracts for share indexes in Japan, Australia and Hong Kong fell early Thursday following a 0.9% decline for the S&P 500 on Wednesday, while the yen dropped to its weakest level against the greenback in almost three months. The Golden Dragon benchmark of US-listed Chinese shares fell 1.2%.
Tech-heavy Nasdaq 100 dropped 1.6% Wednesday, although an after-hours rally in Tesla shares on robust earnings provided support for the tech stocks. An Invesco exchange-traded fund that tracks the Nasdaq 100 climbed around 0.4% in post-market trade, reflecting the gain for the automaker.
The US 10-year yield gained four basis points on Wednesday to the highest level in almost three months as the bond market flashed signs of caution. Yields on Australian bonds rose early Thursday, echoing the moves in Treasuries.
The bond market is trimming bets on the degree of Fed rate reductions over the next year. The term premium on 10-year Treasury notes — an expression of the extra yield investors demand for owning the debt rather than rolling over shorter-term securities — hit the highest since November. Swaps prices also reflected less than a 100% certainty that the central bank reduces rates at each of its two remaining policy meetings this year.
“The price of options to hedge against Treasury losses is soaring,” said Andrew Brenner at NatAlliance Securities. “In the US, it is about the election and potential sweep. That is what is being built into the rate structure, which is giving the vigilantes the green light. It will reverse, but it might take a severe employment number or a surprise in the election.”
An index of the dollar strengthened against major currencies Wednesday, reflecting the higher yields. The yen was steady early Thursday after falling 1.1% against the greenback in the prior session, rekindling the prospect of official intervention. The Japanese currency traded at around 152 per dollar after touching the weakest level against greenback since July in Wednesday trade. The loonie slid after the Bank of Canada stepped up the pace of easing.
Elsewhere, Taiwan Semiconductor Manufacturing Co. halted shipments to a client after discovering that chips made for that client ended up with Huawei Technology Co., potentially violating US sanctions.
Back in the US, big tech climbed in late hours as Tesla Inc. kicked off the “Magnificent Seven” earnings season with better-than-estimated results. The carmaker jumped 8% after reporting adjusted earnings above the average analyst estimate. The firm also said it expects to achieve slight growth in vehicle deliveries for the full year.
“Earnings season is heating up,” said David Laut at Abound Financial. “We believe there is continued upside ahead for stocks, especially now that we are entering a seasonally strong period of the year for markets.”
Looking Ahead
Investors face a number of risks that could be making them less willing to jump into the market. The next three weeks capture big tech earnings, October’s payrolls report, and the US election, followed by the Fed meeting.
To Jonathan Krinsky at BTIG, equities are finally noticing the moves in bonds and the dollar. That’s a stark contrast to the action in the last couple of weeks, with the bullish narrative being that bonds were re-pricing to where they should be based on the stronger-than-anticipated economy, he noted.
“While that might be fair in the big picture, markets are always concerned with the velocity of the move rather than the overall level, and the fact that stocks didn’t flinch in the face of those moves suggested complacency,” Krinsky said. “Whether this is the start of the pre-election jitters or not, we continue to see downside risk for equities broadly over the coming weeks, with an SPX pullback into the 5,500-5,650 zone a decent probability.”
In corporate news, International Business Machines Corp. declined after the company reported underwhelming revenue in the third quarter, hurt by a slowdown in consulting demand. T-Mobile US Inc. reported more monthly mobile-phone and broadband subscribers that analysts expected, leading it to raise forecasts for new customers and earnings this year.
“Even with the recent move in 10-year Treasury yields, we remain bullish on US large caps,” said Nicholas Colas at DataTrek Research. “History says to discount the idea that rates will blow out because of deficit worries, at least over the near term. Instead, we see higher yields as a sign that economic growth remains robust and corporate earnings growth should continue over the coming quarters.”
