Opening Bell: U.S. Yields Rise Boosting Dollar, Pressuring Equities

Key Events

While yields on US Treasurys resumed their climb this morning, European shares on the STOXX 600 and futures on the S&P 500, Dow and NASDAQ 100 kept falling, despite a rebound in Asian equities earlier today.

The yield on US 10-year bonds reversed yesterday's slide and looks set to continue edging higher, as investors resume their selloff of government bonds. It's important to note that yesterday's selling break coincided with an advance in European shares and with a US stock rebound off the day's lows, whereas today's pick-up is coupled with losses across European equities and US futures. Typically, when investors rotate out of bonds, they buy risk assets. That's a bullish paradigm. Conversely, the current Treasury selloff signals a bearish paradigm, as it is not followed by a rising demand for risk.

Morgan Stanley analysts warned that the stock market has reached a “tipping point.” Rising yields may spur a shift in sector allocations, away from growth stocks and toward value assets, favoring energy, utilities and financials over tech and consumer discretionary. The US investment bank is forecasting a market correction as early as 2019, sooner than what the current market narrative is suggesting.

There has also been a rotation into Asian shares, whose very low valuations provide bargains when compared to the record price levels on US stocks. Japan’s Nikkei 225 and the broader TOPIX rebounded from a four-day rout. China’s Shanghai Composite and Hong Kong’s Hang Seng closed 0.18 percent and 0.08 percent higher respectively.

Global Financial Affairs

Yesterday, most US stocks fell, though technology shares gained, consolidating after a three-day selloff.

The S&P 500 dropped 0.14 percent, due to fear of rising export costs. Materials shares (-3.32 percent) tumbled, followed by stocks in the Industrials sector (-1.54 percent). Energy (+0.89 percent) outperformed, tracking oil prices higher.

Technically, the benchmark index appears to be forming an H&S top, after the MACD and RSI broke down. Also, the RSI provided a negative divergence, after it crossed below its August trough (horizontal black line), while the price is well above its corresponding trough.

The Dow Jones Industrial Average lost 0.21 percent. The NASDAQ Composite eked out a 0.03 percent gain, while the Russell 2000 underperformed, losing 0.47 percent. Technically, all US major indices provided sell signals based on MACD and RSI.

The small cap index formed a trough, lower than those preceding, but still within the uptrend. A peak lower than the August 30, 1,742.09 would establish a downtrend.

The dollar bounced back from its decline after US President Donald Trump said the Fed is tightening interest rates too rapidly. Technically, the DXY may be forming a flag, bullish after the nearly 2.5 percent rise in late September, early October.

Interestingly, the greenback is also strengthening against the yen, perhaps suggesting that foreign investors now see USD-denominated Treasurys as providing safer and better returns than Japan's currency. This pattern may help the dollar overtake the yen as the preferred safe haven currency once again. Technically, the USD/JPY found support by the July peak.

In European FX trade, the euro was unable to hold on to gains after it rallied, alongside the pound, on positive momentum on Brexit talks. Conversely, cable managed to remain in green territory after the Times reported that 30 to 40 Labour MPs would endorse a softer-stance proposal to avert a no-deal Brexit. Officials from both sides of the Channel are meeting in Brussels today to discuss a temporary stay, for the UK, within the EU customs regime.

Meanwhile, the yuan slightly strengthened against the dollar for a second day, easing controversy around China's currency devaluation policy.

WTI slipped back below $75 a barrel, after initially nearing that key psychological level as Hurricane Michael hampered offshore oil production and the IEA issued a warning to the global market.

Up Ahead

• The US Treasury auctions $230 billion worth of debt this week.

• US President Donald Trump holds the latest series of rallies this week ahead of the November 6 mid-term elections.

• US consumer prices, due on Thursday, are expected to have remained elevated in September, climbing 2.3 percent from a year earlier.

• JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) kick off earnings season for US banks on Friday.

Market Moves

Stocks

• Futures on the S&P 500 dropped 0.1 percent.

• The Stoxx Europe 600 slipped 0.2 percent.

• The UK’s FTSE 100 slid 0.1 percent to the lowest level in about six months.

• Germany’s DAX fell 0.3 percent to the lowest level in more than six months.

• The MSCI Asia Pacific Index climbed 0.1 percent, the first advance in more than a week.

• The MSCI Emerging Market Index gained less than 0.05 percent, the first advance in a week.

Currencies

• The Dollar Index climbed 0.1 percent to 95.71.

• The euro was unchanged at $1.1491, the strongest level in a week.

• The British pound gained 0.1 percent to $1.3162, the strongest level in two weeks.

• The Japanese yen dropped 0.1 percent to 113.12 per dollar, the first retreat in a week.

Bonds

• The yield on 10-year Treasurys gained one basis point to 3.21 percent.

• Germany’s 10-year yield lost one basis point to 0.54 percent.

• Britain’s 10-year yield gained less than one basis point to 1.719 percent.

• The spread of Italy's 10-year bonds over Germany's climbed ten basis points to 3.026 percentage points.

Commodities

• West Texas Intermediate crude edged 0.3 percent lower to $74.72 a barrel.

• Gold fell 0.1 percent to $1,188.57 an ounce.