Five alive: US yield curve nears historic level

Oct 20 – Another watershed day for US Treasuries on Thursday – the entire curve came within a whisker of trading above 5% – is set to weigh heavily on Asian market sentiment on Friday and potentially seal one of the biggest weekly losses for regional stocks in months.

The gloomy end to the week comes as investors also await inflation figures from Japan, Malaysia, and Hong Kong; remarks from Bank of Japan governor Kazuo Ueda; and an interest rate decision from China.

The People’s Bank of China is widely expected to leave its one- and five-year loan prime rates unchanged at 3.45% and 4.20%, respectively. But after Bank Indonesia’s shock rate hike on Thursday, traders won’t be taking anything for granted.

But market sentiment and direction across Asia on Friday will be driven by the dramatic repricing of the US bond market that shows no sign of cooling. If anything, it is heating up by the day.

The US 10-year yield has shot up 35 basis points this week, on track for its biggest weekly rise in over a decade. The 2s/10s yield curve has steepened 27 basis points, which would be the biggest weekly steepening move since March.

There are plenty of cross-currents flowing through markets right now – mixed US earnings, war in the Middle East and spiking oil prices, and another debacle on Capitol Hill as US lawmakers again failed to elect a House speaker.

But the catalyst for Thursday’s volatility was remarks by Federal Reserve Chair Jerome Powell, who said signs of above-trend growth or a too-strong labor market could warrant more monetary tightening.

Wall Street – which had earlier in the day traded higher on strong US jobs data and Netflix earnings – quickly flipped as bond yields leaped higher. The 10-year yield rose as high as 4.996%, a level not seen since July 2007.

The MSCI Asia ex-Japan index is already down more than 2% so far this week. Given the extent of Wall Street’s slide on Thursday and potential event risk from the Middle East over the weekend, it is almost certain to end the week at a new low for the year.

On the economic data front, data are expected to show Japan’s annual core inflation rate was 2.7% in September, cooling from 3.1% in August. That would be the lowest inflation since July last year.

The BOJ will scrutinize the data at its next policy meeting on Oct. 30 to 31, when policymakers are expected to raise their inflation outlook, potentially signaling another step towards exiting years of ultra-easy monetary policy.

Yen traders, with dollar/yen stuck up near 150.00, will be paying close attention too.

Here are key developments that could provide more direction to markets on Friday:

– China interest rate decision

– Japan inflation (September)

– BOJ governor Ueda speaks

(By Jamie McGeever; Editing by Josie Kao)

Wall Street ends down as Treasury yields surge, Powell speaks

NEW YORK, Oct 19 – US stocks ended lower on Thursday, with shares of Tesla down sharply and Treasury yields surging after Federal Reserve Chair Jerome Powell spoke about monetary policy and investors worried whether rates would stay higher for longer.

Tesla (TSLA) shares dropped a day after the carmaker missed Wall Street expectations on third-quarter gross margin, profit, and revenue, and its CEO Elon Musk said he was concerned about high interest rates affecting demand.

Treasury yields rose further and the benchmark 10-year note yield was at a 16-year high of almost 5%.

“The 10-year looks like it’s establishing a new higher trend, which … is putting pressure on equities, at least in the short term,” said Oliver Pursche, senior vice president, advisor for Wealthspire Advisors in Westport, Connecticut.

“Markets were hoping that Jay Powell would indicate that the Fed is going to pause in its interest rate hikes, and he effectively hinted at the idea that they’re going to have to raise again if they continue to have elevated concerns over inflation.”

Powell said at the Economic Club in New York that US central bankers were moving carefully on policy after aggressive rate hikes last year, but he added that the economy’s strength and continued tight labor markets could warrant further rate hikes.

According to preliminary data, the S&P 500 lost 37.02 points, or 0.86%, to end at 4,277.58 points, while the Nasdaq Composite lost 128.61 points, or 0.97%, to 13,185.69. The Dow Jones Industrial Average fell 254.24 points, or 0.76%, to 33,410.84.

Data this week has pointed to strong consumer demand and a tight labor market. A US Labor Department report on Thursday showed the number of Americans filing new claims for unemployment benefits fell to a nine-month low last week.

Also in earnings, Netflix (NFLX) shares jumped after the world’s No. 1 streaming company by subscriber count said it was raising prices for some of its plans in the United States, Britain, and France after adding 9 million users in the third quarter.

(Reporting by Caroline Valetkevitch; additional reporting by Shubham Batra and Shashwat Chauhan in Bengaluru; Editing by Dhanya Ann Thoppil, Saumyadeb Chakrabarty, Vinay Dwivedi, and David Gregorio)

Gold firms for third day on Mideast conflict, hopes of Fed rate pause

Oct 19 – Gold gained for a third consecutive session on Thursday as growing tensions in the Middle East sparked safe-haven demand, while remarks from Federal Reserve Chair Jerome Powell fuelled hopes the US central bank may pause rate hikes.

Spot gold rose 1.3% to USD 1,973.41 per ounce by 2:58 p.m. ET (1858 GMT). US gold futures settled 0.6% higher at USD 1,980.50.

Israel pounded Gaza with more air strikes, as British Prime Minister Rishi Sunak followed US President Joe Biden on visits to demonstrate support for the war against Hamas while urging Israel to ease the plight of besieged Gazans.

While gold has gained due to the war, “buying exhaustion is fairly imminent,” said Daniel Ghali, commodity strategist at TD Securities.

Powell walked a narrow line in his remarks, leaving open the possible need for more rate hikes because the economy had proved stronger than expected, but also noting emerging risks and a need to move with care.

“The market is not taking this as a hawkish stance by any means. It looks like there are too many risks to the outlook of the economy and this will likely support gold prices,” said Edward Moya, senior market analyst at OANDA.

Traders now see a 70% chance of no rate hike in December compared with a near 50% chance before Powell’s remarks, according to CME’s FedWatch Tool.

Higher interest rates increase the opportunity cost of holding gold, a non-yielding asset.

“Any signs of deteriorating data in the US is required to get discretionary interest into the precious metal, which has been a large missing piece. Recession would allow Fed to cut rates and help prices move north of USD 2,100,” Ghali added.

Spot silver rose 0.1% to USD 22.89, platinum was up 0.5% at USD 889.92 and palladium fell 1.5% to USD 1,112.12.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Krishna Chandra Eluri and Shailesh Kuber)

Fed’s Powell to take the stage amid a suddenly choppy landscape

Oct 19 – Federal Reserve Chair Jerome Powell will take the podium in New York on Thursday with his colleagues at the US central bank in apparent agreement to hold interest rates unchanged at their next meeting in two weeks but with still-great uncertainty about what happens after that.

In remarks scheduled for 12 p.m. (1600 GMT) at the Economic Club of New York, Powell will all but close out a frenetic month following US monetary policymakers’ last meeting in mid-September, when they opted to leave their benchmark lending rate unchanged in a range of 5.25% to 5.50% to assess how the economy was evolving.

Since then, data has shown US job growth reaccelerating unexpectedly, retail sales defying predictions of a slowdown and varying measures of prices offering up inconsistent signals as to whether inflation is on track to return to the Fed’s 2% target in a timely manner.

If that were not enough, the bond market is reeling and tightening financial conditions at a rapid clip. The most deadly Middle East conflict in years has erupted, with no swift resolution in sight and worries it may widen into a regional war with unknown economic consequences.

Hours before Powell was due to speak, the latest read on the labor market showed new claims for unemployment benefits tumbling to the lowest since January, although the rolls of those on benefits for more than a week edged up to the highest since July.

At the same time, the bond market sell-off continued, threatening to drive the yield on the 10-year Treasury note that is instrumental as a credit benchmark for households and businesses above the 5% threshold for the first time since 2007.

The Fed chair must parse it all while walking a fine line between sounding too confident or too doubtful, with a lean too far in either direction having the potential to swing financial markets – and overall financial conditions in their wake – in unwanted directions.

Powell’s appearance comes less than 48 hours before the beginning of the traditional quiet period ahead of the rate-setting Federal Open Market Committee’s meeting on Oct. 31-Nov. 1. While a handful of other Fed officials have appearances later on Thursday and Friday before blackout begins on Saturday, it is Powell’s remarks that will set the tone for policy expectations heading into that meeting, and financial markets will hang on every word.

“We think the Fed chair will stick to the message delivered by Vice Chair (Philip) Jefferson that the data has been coming in stronger than expected, but there has also been a big move in yields, which has tightened financial conditions, so no urgency for a policy response in November and the Fed can adopt a wait-and-see approach,” Evercore ISI Vice Chairman Krishna Guha wrote.

Indeed, another senior Fed official – Governor Christopher Waller – on Wednesday said he wants to “wait, watch and see” if the US economy continues its run of strength or weakens in the face of the Fed’s rate hikes to date. It was a notable signal from one of the Fed’s more hawkish policymakers that rates for now look set to remain where they are, and it parallels recent commentary from other officials during the turbulent inter-meeting period.

Should they leave rates unchanged in two weeks as is now widely expected, it would mark the first back-to-back meetings with no rate increase since the Fed kicked off its hiking campaign in March 2022.

While inflation has abated significantly from its peak levels in June 2022, progress has been choppy and Fed officials like Waller are eager to see if the tightening they’ve delivered so far begins to “bite” and slow activity sufficiently to return inflation to target without causing a recession.

A Reuters poll of more than 100 economists published on Wednesday showed more than 80% expect no rate hike at the next meeting, and most also believe the Fed is done with rate hikes even though a majority of policymakers at their September meeting projected one more quarter-point increase was likely to be needed by year end.

Many in the poll offered the caveat that if progress on inflation stalls out or reverses, the Fed would not hesitate to resume raising rates.

Waller said as much on Wednesday: “If the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run-up in longer-term rates.”

(Reporting by Dan Burns and Ann Saphir; Editing by Andrea Ricci and Chizu Nomiyama)

After US IPO stumbles, companies under pressure to offer bargains

NEW YORK, Oct 19 – Companies pursuing US initial public offerings (IPOs) after a string of lackluster stock market debuts are receiving advice from investment bankers to lower their valuation expectations.

The IPO market saw a flurry of big listings in the last five weeks, emerging from an arid spell that lasted most of 2022 and 2023 and was driven by stock market volatility amid rising interest rates.

There were four major IPOs, and three of them disappointed investors. Shares of German sandal-maker Birkenstock (BIRK), grocery delivery app Instacart (CART), and chip designer Arm Holdings (ARM) dropped below their IPO prices in the days that followed their debuts, though Arm’s shares are now slightly over that price.

Only the shares of marketing automation platform Klaviyo Inc (KVYO) have consistently traded over their IPO price, ending trading on Wednesday 2% over it.

Nine bankers and lawyers interviewed by Reuters said that high interest rates have made investors more risk-averse. They are advising companies to seek more conservative valuations in their IPOs so they can entice stock market investors with bargains.

“(Companies) understand that if you come to the IPO market in the near term, you’re going to suffer some of the hangover from the performance of these recent high-profile transactions,” said David Levin, co-head of equity capital markets at Guggenheim Securities.

The four big IPOs were a shot in the arm to US listing volumes. Total proceeds from IPOs on US exchanges totaled USD 19.4 billion from the start of 2023 to the end of last week, a two-year high that nearly tripled the haul over the same period last year, according to LSEG.

Those proceeds are a fraction of the haul during the same period from 2019-2021, however, when proceeds ranged from USD 43.3 billion to USD 119.2 billion.

The overall performance of IPOs this year has been lackluster. More than three-quarters of companies that went public, excluding blank-check acquisition firms, are trading below their IPO price, according to Renaissance Capital.

Healthcare payments tech firm Waystar, insurance group Hamilton, and oil-and-gas helicopter provider PHI Group will have to decide in the coming days whether they will proceed with their IPOs and how aggressively they will price them.

The companies have published their IPO registration statements so they can be ready to launch their stock market debuts in the next few days, ahead of a potential US government shutdown next month that would freeze listings because it would cut funding to the financial regulators overseeing them. It remains unclear whether the shutdown will happen, as US lawmakers struggle to elect a speaker in the House of Representatives.

Representatives from Waystar and PHI did not immediately respond to requests for comments. Hamilton declined to comment.

VALUATION ADJUSTMENT

Going by the performance of Birkenstock’s listing, some IPO hopefuls may have to significantly adjust their valuation expectations.

Birkenstock was seeking a valuation equivalent to about 27 times trailing 12-month earnings before interest, taxes, depreciation, and amortization at the top of its indicated IPO range. It ended trading on Wednesday worth only about 17 times that.

“When the stock opens more than 10% below where the IPO was priced, it is a clear sign the deal outpriced its demand,” capital markets consultant and Wharton School lecturer David Erickson said of Birkenstock’s IPO.

For some companies, the hostile IPO environment may prove too much. Rubrik, the cybersecurity software company backed by Microsoft Corp MSFT.O, was planning to launch its IPO investor roadshow as early as this month had the market been more receptive, a person familiar with the matter said. It is now holding back.

A Rubrik spokesperson declined to comment.

“We continue to see demand for high-quality companies, but investors remain cautious and sensitive to valuations,” said Robert Stowe, head of Americas equity capital markets at Barclays Plc (BARC).

(Reporting by Echo Wang in New York; Additional reporting by Deborah Sophia in Bengaluru
Editing by Greg Roumeliotis and Rod Nickel)

Oil slips as Venezuela sanctions ease, Middle East in focus

LONDON, Oct 19 – Oil prices fell about 1% on Thursday as the United States eased sanctions on Venezuela to allow more oil to flow globally, but fears that Israel’s military campaign in Gaza may escalate to a regional conflict kept a lid on losses.

Brent futures for December were down USD 1, or 1.1%, to USD 90.50 a barrel at 1307 GMT. U.S. West Texas Intermediate (WTI) futures for November, which expire on Friday, stood at USD 87.39 per barrel, down 93 cents, or 1.1%.

The more active December WTI contract fell 1%, or 83 cents, to USD 86.44 a barrel.

The United States issued a six-month licence authorising transactions in Venezuela’s energy sector, an OPEC member, after a deal was reached between Venezuela’s government and the political opposition there to ensure fair 2024 elections.

The deal is not expected to quickly expand Venezuela’s oil output but could boost profits by returning some foreign companies to its oilfields and providing its crude to a wider set of cash-paying customers, experts said.

Oil prices climbed about 2% in the previous session on concerns about disruptions to global supplies after Iran called for an oil embargo on Israel over the conflict in Gaza and after the U.S., the world’s biggest oil consumer, reported a larger-than-expected inventory draw, adding to already tight supplies.

The Organization of the Petroleum Exporting Countries (OPEC) is not planning to take any immediate action on OPEC member Iran’s call, sources told Reuters, easing concerns over potential disruptions.

“Although OPEC shows no indication of taking up Iran’s call to impose an oil boycott on Israel, oil will almost certainly become a feature of the conflict in several ways,” RBC Capital Markets analyst Helima Croft said.

“At a minimum, the prospect of Saudi Arabia phasing out its 1 million barrel per day (bpd) unilateral production cut as part of a grand bargain that would include Israel normalization is off the table for now,” Croft said, referring to recent talks over Saudi Arabia potentially normalising relations with Israel.

Saudi Arabia had said it would keep its voluntary cut until the end of the year.

Japan, the world’s fourth-largest crude buyer, on Thursday urged Saudi Arabia and other oil producing nations to increase supplies to stabilise the global oil market, as rising fuel prices amid the conflict could impact the global economy.

US crude oil and fuel inventories dropped last week on rising demand for diesel and heating oil, according to data from the Energy Information Administration (EIA). Distillate fuel stockpiles fell by 3.2 million barrels in the week to Oct. 13 to 113.8 million barrels, EIA data showed.

Crude inventories fell by 4.5 million barrels to 419.7 million barrels, while gasoline fell by 2.4 million barrels to 223.3 million barrels.

(Additional reporting by Katya Golubkova in Tokyo and Emily Chow. Editing by Mark Potter, Kirsten Donovan)

Oil settles up 1% on nagging worries about Middle East

Oct 19 – Oil prices settled higher on Thursday as traders remained nervous that Israel’s military campaign in Gaza could escalate to a regional conflict.

Brent futures for December settled up 1%, or 88 cents, at USD 92.38 a barrel while US West Texas Intermediate (WTI) futures for November, which expire on Friday, settled up USD 1.05, or 1.2%, at USD 89.37 a barrel. At their session lows, both benchmarks were down more than USD 1 a barrel.

Israeli Defence Minister Yoav Gallant told troops gathered at the Gaza border that they would soon see the Palestinian enclave “from inside”, suggesting an expected ground invasion with the aim of annihilating Hamas could be nearing.

Egyptian aid trucks moved closer to the only crossing into Gaza not controlled by Israel, but still had not passed through despite a request from US President Joe Biden to allow the aid.

“We are still very much in flux and the potential to escalate, particularly from the Arab world, is an issue,” said John Kilduff, partner at Again Capital LLC in New York.

US forces in Syria brought down two drones that were targeting them, leading to some minor injuries, US officials said.

Prices were supported later in the session after Federal Reserve Chair Jerome Powell said that the US central bank would be “proceeding carefully” on future interest rate hikes, which could slow the economy and dent fuel demand.

Fed funds futures traders are pricing in a 39% probability the Fed will raise rates again by December, but only a 6% chance of a hike in November, according to the CME Group’s FedWatch Tool.

Gains were limited after the US issued a six-month license authorizing transactions in the energy sector of OPEC member Venezuela, whose government reached an agreement with the political opposition there to ensure fair 2024 elections.

The deal is not expected to quickly expand Venezuela’s oil output but could return some foreign companies to its oilfields and provide more cash-paying customers for its crude, experts said.

Easing of US oil sanctions on Venezuela is unlikely to require any policy changes by the OPEC+ producer group for now as a recovery in production is likely to be gradual, OPEC+ sources told Reuters.

On Wednesday, oil prices climbed about 2% on concerns about disruptions to global supplies after OPEC member Iran called for an oil embargo on Israel over the conflict in Gaza and after the US, the world’s biggest oil consumer, reported a larger-than-expected inventory draw, adding to already tight supplies.

The Organization of the Petroleum Exporting Countries (OPEC) is not planning to take any immediate action on Iran’s call, sources told Reuters.

Saudi Arabia had said it would keep its voluntary output cut until year-end. Japan, the world’s fourth-largest crude buyer, urged the Saudis and other oil-producing nations to increase supplies to stabilize the global oil market which could be roiled by the conflict.

Crude inventories fell by 4.5 million barrels to 419.7 million barrels, while gasoline fell by 2.4 million barrels to 223.3 million barrels.

(Additional reporting by Katya Golubkova in Tokyo and Emily Chow; Editing by Mark Potter, Kirsten Donovan, and David Gregorio)

Sit molestiae maiore

Dolore veritatis ven.

Markets buckle under bond yield weight

Oct 19 – A sea of red across world stock markets and another surge in US Treasury yields on Wednesday will likely ensure a bearish open in Asia on Thursday, as investors also brace for monetary policy decisions and outlooks from South Korea and Indonesia.

The regional economic data calendar is pretty full too, with the latest trade figures from Japan and Malaysia, and the latest unemployment numbers from Australia and Hong Kong also on tap.

Investors may also deliver a delayed or revised verdict on China’s generally upbeat economic indicators from Wednesday, which included third-quarter year-on-year growth of 4.9%, much stronger than most economists had expected.

Chinese stocks fell sharply on Wednesday, pressured by deepening turmoil in the country’s property sector as top private developer Country Garden flirts with default. Could investors decide if the GDP and other indicators show the economy is in better shape than feared?

Maybe. But the one-two combination of new multi-year highs for US bond yields and a steep selloff on Wall Street looks set to deliver an early blow to Chinese and other markets across Asia on Thursday.

As well as rising bond yields on Wednesday, Wall Street felt the heat from downbeat US earnings. Stocks fell the most in two weeks, even though the message from Fed officials on the stump was that interest rate hikes are probably over.

The selling pressure bearing down on the US bond market simply refuses to relent. The 10-year yield scaled 4.90% for the first time since 2007, and the two-year hit a fresh 17-year high of 5.2440%.

The curve bear steepened again too. The 2s/10s yield curve has steepened 14 out of the last 17 trading sessions, and Wednesday’s move was the biggest in three weeks.

On top of that, oil and gold prices continue to move higher, reflecting investors’ ongoing unease regarding events in the Middle East.

In currencies, the dollar is pressing right up against 150.00 yen. Given how high US yields are moving, it is little wonder – the 2-year US/Japanese yield spread reached 517 basis points on Wednesday, the widest gap in favor of the dollar since December 2000.

Will the Bank of Japan intervene? It stepped into the Japanese Government Bond market on Wednesday to buy bonds and put a cap on the 10-year yield, which had spiked to a new decade high of 0.819%.

The main events on the regional calendar on Thursday will be the policy decisions from Bank of Korea and Bank Indonesia. Both are expected to keep the rate on hold, before easing policy in the second quarter of next year, according to Reuters polls.

Here are key developments that could provide more direction to markets on Thursday:

– South Korea interest rate decision

– Indonesia interest rate decision

– Several Fed officials speak, including Chair Jerome Powell

(By Jamie McGeever; Editing by Josie Kao)

Wall Street falls more than 1%; yields rise, investors assess earnings

NEW YORK, Oct 18 – US stocks ended sharply lower on Wednesday, with the S&P 500 and Nasdaq falling more than 1% each, as Treasury yields rose again and investors assessed the latest batch of quarterly corporate results and forecasts.

Mounting tensions in the Middle East stoked risk aversion. Safe-haven gold hit its highest level in more than two months. The Cboe Volatility index, Wall Street’s fear gauge, jumped.

Yields edged higher after data showing US single-family homebuilding rebounded in September, supporting the view that the Federal Reserve will keep interest rates higher for longer.

“We’re in a period of sector rotation, and people are trying to figure out in this new environment – in a full reset of rates across the curve – what are the stocks that are going to continue to do well and what are the stocks that are going to suffer,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

“Obviously, companies that are highly leveraged have difficulties in this kind of a market.”

Higher yields from risk-free US Treasuries dull the appeal of stocks.

On the earnings front, Procter & Gamble (PG) shares gained 2.6% after its quarterly sales topped market expectations, while United Airlines Holdings (UAL) shares plunged 9.7% after the company forecast weaker fourth-quarter profit due to higher costs. The S&P 500 passenger airlines index dropped 5.6%.

The Dow Jones Industrial Average fell 332.57 points, or 0.98%, to 33,665.08, the S&P 500 lost 58.6 points, or 1.34%, to 4,314.6 and the Nasdaq Composite dropped 219.45 points, or 1.62%, to 13,314.30.

Investors have been worried about repercussions from the Israel-Hamas conflict that began Oct. 7 with a Hamas attack on Israeli civilians and soldiers. US President Joe Biden, during a lightning visit on Wednesday, pledged solidarity with Israel and said a deadly blast at a Gaza hospital seemed to have been caused by a rocket misfired by militants.

Also in earnings news, Morgan Stanley’s (MS) third-quarter profit showed a hit from lethargic dealmaking. Shares ended the day down 6.8%.

After the closing bell, shares of Tesla (TSLA) were up about 2% and Netflix (NFLX) jumped about 12% after the companies reported quarterly results. Tesla ended the regular session down 4.8% and Netflix ended the session down 2.7%.

More results are expected in the coming days as the third-quarter US earnings season kicks into high gear.

Volume on US exchanges was 10.48 billion shares, compared with the 10.45 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 4.67-to-1 ratio; on Nasdaq, a 3.33-to-1 ratio favored decliners.

The S&P 500 posted 12 new 52-week highs and 25 new lows; the Nasdaq Composite recorded 25 new highs and 252 new lows.

(Additional reporting by Ankika Biswas and Shashwat Chauhan in Bengaluru; additional reporting by Sruthi Shankar; editing by Arun Koyyur, Vinay Dwivedi, Nick Zieminski, and David Gregorio)

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