US index futures slid and global markets dropped as yields rose to session highs as complacent investors once again pressed hopes that the Israel-Hamas war could be resolved diplomatically, after Joe Biden said he will travel to Israel to "show his support", which in turn shifted attention back to the untenable US fiscal situation which meant the blowout in yields would continue. At 8:15am S&P futures dropped 0.3% as traders assessed a flurry of major earnings. 10Y TSY yields rose to a high of 4.76%, spiking 20bps in the past two days and undoing much of the "flight to safety" after the Israel war. The dollar steadied, while the pound fell after cooling UK wage growth reduced pressure on the Bank of England to raise interest rates further. Israel’s shekel gained after weakening past 4 against the greenback on Monday. Brent crude oil traded near $90 a barrel.
Today we get the September retail sales and industrial production data before markets open, as well as reports on business inventories and cross-border investment. We also get a slew of Fed speakers including New York Fed President John Williams, Richmond Fed President Tom Barkin, Fed Governor Michelle Bowman and Minneapolis Fed President Neel Kashkari.
In premarket trading, Bank of America gained after its net interest income beat estimates even as its HTM losses soared by $26 billion to a record $132 billion. Goldman Sachs Group Inc. fluctuated as its results showed a beat in trading revenue and a drop in profit. Here are some other premarket movers:
The market mood was largely set by news that JOe Biden is set to travel to Israel Wednesday, aiming to show solidarity with the US’s closest ally in the Middle East and prevent the conflict from engulfing the wider region. He’ll then be in Jordan for talks with King Abdullah II and Egyptian and Palestinian Authority leaders.
“Markets fear a ground offensive by Israel that could ignite a larger and more complicated regional conflict that risks regional supply chains, energy output, economic growth and financial stability,” said Kyle Rodda, senior market analyst at Capital.com. “The presence of President Biden in the region potentially lowers the odds of such an offensive in the coming days, providing markets with some breathing room, if only for a small window.”
Meanwhile, investors are closely assessing the health of this batch of corporate results, after Wall Street strategists warned that the outlook for earnings is weakening. An update is also due Tuesday from United Airlines Holdings Inc. before Netflix Inc. and Tesla Inc. kick off tech-related earnings on Wednesday.
On top of geopolitics and earnings, Bloomberg notes that traders are tracking comments from a slew of Federal Reserve speakers this week before a blackout period in the lead-up to the central bank’s November rate-setting meeting. Philadelphia Fed President Patrick Harker on Monday repeated comments he made last week asserting the central bank can hold its benchmark rate steady as long as there is not a sharp turn in the economic data.
Pessimism around the economic outlook is driving investors to cash, according to BofA’s global fund manager survey. The broadest measure of sentiment — based on cash positions, equity allocation and economic predictions — fell in the October poll after showing an improvement in the summer months, BofA strategists led by Michael Hartnett wrote in a note. Cash levels as a percentage of assets under management have climbed above 5%.
A net 50% of investors in the BofA survey expect a weaker global economy over the next 12 months, with more concerned about a hard landing than previously. At the same time, the soft landing of a “Goldilocks” scenario remains the base case. Most surveyed remain convinced the Fed has finished its rate-hiking cycle.
European stocks opened higher but then traded lower as markets awaited President Biden’s arrival in Israel. The Stoxx 600 is down 0.4% after fluctuating during the trading session. Ericsson AB plunged more than 9% after the Swedish 5G-equipment maker warned of persisting weak demand. Rolls Royce Holdings Plc rose after the jet engine maker announced plans to cut jobs and streamline its business. Poland’s stocks and currency extended gains following Sunday’s elections, which gave pro-European Union parties a majority in parliament. Here are some of the most notable European movers:
Earlier in the session, Asian stocks advanced, halting a two-day selloff, as technology stocks rallied amid easing concerns over a wider conflict in the Middle East. The MSCI Asia Pacific Index climbed as much as 0.8%, with chipmakers Taiwan Semiconductor and Samsung the biggest boosts. Benchmarks in South Korea, and the Philippines were among the largest gainers amid broad regional gains.
In FX, the Bloomberg Dollar Spot Index rose 0.3% as markets weighed ongoing diplomatic efforts to contain an escalation in the Israel-Hamas war; the dollar gained against all Group-of-10 peers bar the Australian dollar
In Rates, treasuries resumed their selloff on Tuesday, with futures near session lows as US trading day begins after sliding during Asia session and London morning. Weakness continues to be led by long-end and intermediates, steepening the curve. US yields are cheaper by more than 6bp at long end, steepening 2s10s, 5s30s curves by ~4bp and ~2bp on the day; 10-year around 4.80% is cheaper by ~10bp vs Monday close with bunds and gilts outperforming by 1bp and 4bp in the sector. Gilts outperform their German counterparts after UK wage growth eased in August. UK two-year yields are down 2bps.
In commodities, Brent futures rise 0.5% to trade near $90.10 and spot gold adds 0.2% to around $1,923.
Bitcoin traded just above $28,000; Israel ordered a freeze on some crypto accounts in a bid to block funding for Hamas with about 100 accounts on Binance closed after appeals for donations appeared on social media, according to FT.
To the day ahead, and today’s data releases include US retail sales, industrial production and capacity utilisation for September, along with the NAHB’s housing market index for October. Elsewhere, we’ll get Canada’s CPI for September and the German ZEW survey for October. From central banks, we’ll hear from the Fed’s Williams, Bowman, Barkin and Kashkari, ECB Vice President de Guindos, the ECB’s Knot, Centeno, Holzmann and Nagel, and the BoE’s Dhingra. Finally, today’s earnings releases include Bank of America, Goldman Sachs, United Airlines, and Johnson & Johnson.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly positive following the gains across global counterparts which unwound the recent geopolitical hedging and with President Biden to travel to the Middle East on Wednesday, although the upside was capped as risks of a widening conflict in the Middle East conflict lingered amid threats from Iran. ASX 200 was led by outperformance in tech and telecoms, while mining names also benefitted following Rio Tinto’s uarterly update which showed an increase in iron ore shipments despite a decline in output. Nikkei 225 was boosted at the open and briefly climbed above 32,000 although has since pulled back from intraday highs and proceeded to oscillate around the key aforementioned level. Hang Seng and Shanghai Comp. were both positive although the mainland lagged amid developer debt concerns with Country Garden on the cusp of a default as the grace period for a USD 15mln coupon payment expires today and with an Evergrande unit to seek creditor approval to extend yuan-denominated bonds.
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European bourses are near the unchanged mark with performance mixed as some regions manage to eke out mild gains while others reside slightly in the red as geopolitical tensions continue to dominate newsflow, Euro Stoxx 50 -0.3%. After the cash open, a bout of pressure occurred in proximity to remarks from the Iranian Supreme Leader Khamenei, commentary which aired just prior to the ZEW release which sparked a recovery from the rhetoric-driven session lows in European equity benchmarks. Sectors are mixed with defensively inclined components such as Real Estate, Health Care and Utilities outperforming while Basic Resources is the laggard alongside underlying benchmarks and after Rio Tinto's update.
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Fixed Income
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Geopolitics
Central Bank speakers
US Event Calendar
DB's Jim Reid concludes the overnight wrap
Markets seems to be taking the geopolitical risk session by session at the moment, rather than having any strategic sense of where things are heading. It feels like we're in a very dangerous and delicate holding pattern for now, but with no major developments since the Israeli evacuation notice to Gaza residents on Friday, markets have taken off their weekend hedges over the last 24 hours or so.
Headlining this was the +1.06% advance in the S&P 500, which represents the best start to a week since February. Meanwhile the whipsaw in bonds continued with 10yr Treasury yields up +9.4bps on the day to 4.71%, with another +3.8bps move overnight to 4.74%. This time yesterday we highlighted reports that US President Biden was considering a trip to Israel, which was generally taken as a positive sign that the US is working to prevent an escalation, or that one won't happen while he's in the region. But that visit from Biden has since been confirmed by US Secretary of State Blinken overnight, and is set to take place tomorrow. Yesterday’s market moves showed that assets most sensitive to an escalation were reacting in a positive direction. For instance, Brent crude oil prices were down -1.36% to $89.65/bbl, Israel’s TA-35 equity index was up +2.46%, and the US Dollar index weakened by -0.38% as investors took out some of the recent geopolitical risk premium. The exception was Israel’s shekel, which weakened to an 8-year low against the dollar (-0.90%).
The bond sell-off was matched by growing anticipation that the Fed might deliver another rate hike in 2023 after all, with pricing for a hike by December up from 32% at the close last week, to 37% yesterday. In turn, yields on 2yr Treasuries were up +4.3bps to 5.10%, whilst the 30yr yield was up +9.7bps to 4.85%. The long-end sell off was shared across real yields and breakevens, with the 10yr real yield up +4.5bps to 2.32%, and the 30yr real yield was up +5.3bps to 2.42%. US retail sales and industrial production today will be a chance for the macro to compete with the geopolitics again for bonds.
It was much the same story in Europe, with yields rising across most of the continent. Those on UK gilts saw the biggest increase, with the 10yr yield up +9.5bps to 4.48%, which followed comments from BoE Chief economist Pill that there was still “some work to do” for the Monetary Policy Committee to achieve their inflation target. Elsewhere in Europe, yields on 10yr bunds (+4.7bps) and OATs (+3.8bps) also moved higher, but BTPs (-1.0bps) were the exception in spite of a government announcement of a new €24bn budget law that includes tax cuts and public sector wage rises. So risk-on offset the fiscal implications.
Whilst bonds were selling off, equities saw a much better performance with all 24 industry groups in the S&P 500 (+1.06%) rising on the day. Small-cap stocks were one of the strongest performers as the Russell 2000 rose +1.59%. Meanwhile in Europe, the STOXX 600 (+0.23%) also recovered from Friday’s losses, and Polish equities saw a major outperformance following the election on Sunday which will likely yield a pro-EU government under the leadership of former Polish PM and European Council President Donald Tusk. That rally included the WIG20 index (+5.31%), which had its best day since February 2022, whilst the Polish Zloty (+1.82%) had its best day against the Euro since March 2022.
In other news, the sharp run-up in European natural gas prices subsided yesterday, with a -12.2% decline to €48.6/MWh. That’s been h elped by the absence of an escalation in the Middle East, as well as the prospect of milder weather after the present colder period passes. European gas storage is now some way above its levels at the same point in recent years, with storage facilities 97.95% full as of Sunday. There was also a decent move lower in US natural gas futures (-3.92%) as well yesterday, which saw their biggest decline in nearly a month.
Overnight in Asia, those gains for equities have continued against the backdrop of ongoing diplomatic efforts. All the major indices have advanced, including the KOSPI (+1.16%), the Nikkei (+1.08%), the Hang Seng (+0.70%), the CSI 300 (+0.46%) and the Shanghai Comp (+0.26%). Overnight, we’ve also seen a selloff among Australian government bonds following the release of the RBA’s minutes from the October meeting. That said they considered raising rates this month, and also that “the board has a low tolerance for a slower return of inflation to target than currently expected.” In light of that, yields on 10yr Australian government bonds are up +9.2bps, and the Australian Dollar is the best-performing G10 currency overnight. Looking forward, US equity futures are slightly lower this morning, with those on the S&P 500 down -0.12% ahead of several earnings releases this week.
There wasn’t much in the way of data releases yesterday, although we did get the Empire State manufacturing survey for October in the US. That fell back into negative territory at -4.6 (vs. -6.0 expected), and the measure of unfilled orders (-19.1) fell to its lowest level since May 2020 during the initial wave of the pandemic. There were also some more positive signals on the inflation side, with the 6-months ahead prices received indicator down to a 3-year low of 16.0.
Looking forward, we could get some more developments on the election of a new Speaker of the US House of Representatives today. The Republicans have nominated Rep. Jim Jordan, and yesterday he appeared to receive the backing of some key Republicans that had been opposed to his nomination. CNN reported yesterday that Jordan said he would force a floor vote at noon today for the speaker election, so that’s one to look out for. Should Jordan be confirmed as Speaker, investors will be watching what this means for fiscal bargaining in Congress ahead of the next government shutdown deadline in mid-November .
To the day ahead, and today’s data releases include US retail sales, industrial production and capacity utilisation for September, along with the NAHB’s housing market index for October. Elsewhere, we’ll get Canada’s CPI for September and the German ZEW survey for October. From central banks, we’ll hear from the Fed’s Williams, Bowman, Barkin and Kashkari, ECB Vice President de Guindos, the ECB’s Knot, Centeno, Holzmann and Nagel, and the BoE’s Dhingra. Finally, today’s earnings releases include Bank of America, Goldman Sachs, United Airlines, and Johnson & Johnson.