ASX to fall, bond volatility persists, Bullock speech on radar

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The yield on the US 10-year note was 6 basis points lower to 4.85 per cent at 4.59pm after having spiked to 5.021 per cent, a 16-year-high, in early New York trade.

The VIX, or equity volatility measure, fell 6.2 per cent to 20.17 in Chicago.

The drivers

The early New York rise in bond yields was attributed to a mix of news from rising US debt to renewed worry about a wider Middle East conflict.

In a Bloomberg opinion comment, Mohamed El-Erian reiterated his view that the recent bond volatility reflects both the loss of secular anchoring and the gradual weakening of short-term stabilisers.

In a post on X, Bill Ackman said he covered his short bet on US Treasuries, saying “there is too much risk in the world to remain short bonds at current long-term rates”.

Yardeni Research said it sees more danger ahead for markets. “The risk in the bond market is that the difference in the supply factor could push yields higher than 5.00 per cent. That’s another way of saying that the risk is that the Bond Vigilantes will take over control of the market, pushing yields so high that they cause a credit crunch and a recession. That may be the only way to force Washington to lower the unsustainable long-term path of the federal deficit.”

Lisa Shalett, CIO at Morgan Stanley Wealth Management, said: “The growing rout in Treasuries reflects bond investors’ desire to be compensated for an expanding list of risks, which now increasingly include geopolitical instability and demands on fiscal spending, as the country already struggles to finance its deficit.”

Shalett also said the surge in yields may reflect “a surprising dearth of buyers (no Federal Reserve, no regional banks, fewer foreigners), raising legitimate questions about US debt sustainability”.

In a note, JPMorgan strategists said tightening in financial conditions has continued largely unabated since the first quarter of 2022. “Given that the impact from a tightening in financial conditions on GDP typically takes 1-2 years, the full effect of the severe tightening that took place last year has yet to be felt. And the continued tightening, albeit at a slower pace, during 2023 should add to this effect until well into 2024.”

While US and China are pushing third quarter global growth forecasts higher, “we expect growth to decelerate this quarter”, the strategists also said.

“We have emphasised caution in extrapolating momentum and there are good reasons to expect global growth to decelerate toward our forecast for a 2 per cent annual rate gain this quarter. But as we extract signals from recent news, the underlying resilience of the global expansion shines brightly despite ongoing monetary restraint.“

Today's agenda

Local: Speech by Michele Bullock, governor – Monetary Policy in Australia: Complementarities and Trade-offs – at the Commonwealth Bank of Australia Global Markets Conference, Sydney at 7pm

Overseas data: Flash October PMIs for Eurozone, UK and US; Paris-based International Energy Agency releases its world energy outlook annual report

United States

The Fed pivot that turbulent Treasuries need At a minimum, US policymakers need to shift from backward-looking data to combining data dependency with a more clearly articulated economic vision, writes Mohamed El-Erian.

Morgan Stanley’s Wilson says profit estimates are too high The odds of a year-end rally in US stocks are fading as investors face a multitude of risks, according to Morgan Stanley’s Michael Wilson.

Don’t anticipate big gains from US equity markets anytime soon, says one Wall Street prognosticator who foresaw the rally in the first half of this year.

The S&P 500 Index peaked in July and is unlikely to trade beyond the mid-4000s for the next six months as higher rates weigh on corporate earnings growth, according to Stifel chief equity strategist Barry Bannister.

“Our view is that the S&P 500 peaked summer 2023 and tops around 4400 through April 2024,” Bannister wrote in a note to clients. He previously predicted stocks would be at that level by the end of December.

Analysts currently see aggregate S&P 500 earnings for the July-September period growing 1.2 per cent year-on-year, slightly below the 1.6 per cent growth projected at the start of the month, according to LSEG.

The Commerce Department on Thursday will announce third-quarter gross domestic product, seen accelerating to 4.3 per cent. Its wide-ranging Personal Consumption Expenditures (PCE) report due on Friday, is expected to show annual headline and core inflation cooling down to 3.4 per cent and 3.7 per cent, respectively.

Commodities

JPMorgan said it remains bullish on the EU’s oil and gas sector. “We upgraded Global Energy to OW last month with the energy supercycle on track and majors cash breakevens deeply ‘in-the-money’ vs. strengthened forward prices. Since we upgraded the sector a month ago, oil macro has become the dominant near term feature owing to rising geopolitical tensions in the Middle East.

“We think these events act as a wake-up call on tightening spare capacity and expedites the market shift from risk discount (demand) to premium.”

Chevron to buy Hess for $84b in second oil mega-merger in weeks The proposed deal raises the competition between Chevron, the No. 2 US oil and gas producer, and Exxon.

Copper touches lowest since November as demand outlook darkens Prices for the metal slumped as much as 1.2 per cent in London before clawing back to be little changed.

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