There are many moving parts influencing financial markets at present, from geopolitical events to bond market volatility and corporate earnings season, and this is adding several layers of uncertainty for traders.
In particular, the bond market is providing some mixed signals, with the 10-year yield surging to fresh 16-year highs above 5% before retreating. When yields rise, this reflects growing expectations that interest rates will be higher for longer. However, when yields fall and bond prices rise, this can be the result of a pessimistic outlook with investors showing a preference for fixed income assets. Both these scenarios have growth implications for stocks. So essentially the wild swings we have seen in bond yields in recent weeks, and the reasons behind the moves, are creating a challenging environment for equity markets as investors try to interpret the direction shifts.
This despite nearly 80% of S&P500 companies having beaten earnings expectations so far. And yet equities are struggling to make a sustained move higher. Which suggests that despite the quite decent corporate sector results for Q3 thus far, interest rate concerns courtesy of bond market movements is keeping a lid on sentiment. Among the big tech names, Microsoft produced a solid Q3 earnings result however elsewhere there was disappointment regarding Alphabet’s cloud business prospects. Meanwhile, the likes of Boeing, IBM and Meta are on deck to report next.
Gold is in consolidation mode, having rallied 9% since the early October lows around $1815. Much of the move higher in the precious metal in recent weeks has been fuelled by a resumption of safe haven buying due to events in the Middle East. During Asian trading hours on Wednesday, gold was at $1973 and still eying a potential return to the $2k level should tensions rise further in the Israel-Hamas conflict. The rally in gold has come even as bond yields have moved to 16-year highs. If yields happen to ease back this could also open a path higher for gold even though positioning currently looks stretched given the run higher so far this month.
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In FX, the USD remains the currency of choice from a yield play, which is keeping the DXY (Dollar Index) propped above the 106 level. Traders will be awaiting US Advance GDP data and Core PCE Price Index figures later this week. Both are expected to show a rise, which if eventuates could lead to further upside in the greenback and yields. Any stronger US growth or inflation data could shift the needle for FOMC interest rate expectations. Meanwhile, the euro slipped after some disappointing PMI data throughout the Eurozone has raised growth concerns for the region.
In Australia, Wednesday saw the release of September Quarter CPI data which came in hotter than expected. The 1.2% rise in Q3 CPI (above the 0.8% rise in the June quarter) will have caught the attention of the RBA ahead of the November policy meeting. As a result of the inflation data moving higher, the AUDUSD rate jumped from 0.6350 to 0.6390 on increased chances that rates may need to move higher to counter the rising CPI.
Looking ahead, bond yields, earnings season and developments in the Middle East will likely continue to shape market sentiment for the rest of the week.
