The mask of strength

Some relief in bond markets this week, but not before the 10-year benchmark hit its highest level since 2002. USD continuing to surge, hitting annual highs. RBA hikes rates as expected, reaction muted. Gold steadying but looks set to finish the week around 2% lower. The headline equity index levels show resilience, but a deeper look reveals pain across a number of sectors. Oil pushing higher as China suspends exports and more US troops are sent to the Middle East, sending diesel prices in the states to record highs. Fiscal crisis in France as public debt balloons, sparking worries of a looming sovereign debt crisis. Yen catches a bid as CPI beats expectations.

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Mask of strength

The headlines show a market largely unperturbed by record jumps in bond yields. The S&P 500 is less than 2% from its all-time high, the Nasdaq hit fresh record levels just last week. Passive investors are largely left wondering what all the fuss is about. So are equity markets brushing off this bond meltdown? When will the effects flow through? Well in most sectors they already have flowed through, and in quite significant fashion. While the S&P 500 was up 2% in the third quarter, the Russell Index was down 7%. The S&P 500 Equal Weighted Index looks set to drop for a seventh week in a row, a run of declines that has only occurred twice before.

This level of distorted breadth in the markets has not been seen since the height of the trade wars. Indeed several sectors have slumped into correction territory, including banks and an historic safe haven in utilities. At the other end of the scale, unprofitable and speculative tech companies have been hit hard too. Thus it is an increasingly small group of stocks holding the indices up. And once more in the end we are left looking to the AI trade - if that starts to break again we could be in real trouble. We had encouraging news in that department overnight though - Anthropic is pushing towards a November IPO that would value it at about $2 trillion.

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New sick man of Europe?

The spread between French and German yields hit its highest since the Eurozone crisis in 2012. Investors have been selling French bonds at a rapid rate. Record levels of government debt are at the core of the crisis, with the deficit still widening and borrowing set to break records next year. A presidential election looming on the horizon is doing nothing to quell fears either, particularly given the increasing likelihood that it will be a battle between candidates from the far left and the far right, neither of whom have laid out convincing plans to remedy the crisis. That coupled with the notoriously resistant French public seemingly leaves any solution in the hands of the ECB. Previously isolated to France, this is now becoming a broader European problem, as such weighing on the common currency. It appears that we are all set to grow more familiar with tools like TPIs in the coming weeks, as pressure on the bond markets continues to rise.

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Next week

Monday brings the ISM Services PMI reading from the US. The FOMC Minutes land on Wednesday, the language therein will be closely scrutinised for signals on the velocity of further rate hikes. Likewise the ECB Monetary Policy Accounts will be of interest, particularly in relation to the French situation. Before all that we will be watching Nonfarm Payrolls tonight, where the consensus expectation is for 90k jobs added.

Third quarter earnings reports from the US are starting to trickle out; PepsiCo and Delta of note next week. Once more bear in mind that with China on holiday, liquidity will be thinner than usual in a number of key markets. Go well out there.