Asia open: Even on a wobbly day, S&P 500 notches eighth straight win

Markets

The US stock market showed a mixed performance on Wednesday, with investors primarily focused on the bond auction and corporate earnings reports amid a week of limited economic data releases. The S&P 500 experienced fluctuations throughout the day but maintained its longest winning streak in nearly two years. The index closed the day eeking out a 0.1% gain, marking its eighth consecutive day of increases, a feat not seen since November 2021.

The recent decline in interest rates, observed last week and today with a 4 basis point drop in 10-year yields, benefits most mega-cap Tech stocks. However, the latter part of the third-quarter earnings season could hamper the broader S&P 500. Over the past 24 hours, several stocks reporting results have experienced significant declines, with 10 down more than 10%, representing substantial moves, particularly for smaller stocks. While not impacting heavily at the index level, it still provided poor economic growth eye candy.

Despite the eye-grabbing decline in oil prices and a proximate downswing in bond yields, stocks aren't showing significant relief. This shift in market sentiment may suggest that the focus has shifted from concerns about inflation to worries about economic growth.

But we are also getting into the lower volatility part of the calendar. We should expect to experience a seasonal decline during November/December as there are fewer important fundamental catalysts and trading volumes slow ahead of the holidays.

Bonds

All eyes were on bonds this week following the sharp rally which turned November's first three trading sessions into a cross-asset bonanza.

There was not a lot of data available to guide the market, so investors had to rely on the FedSpeak and the reaction of bond buyers to determine the market's direction. On Wednesday, the sale of 10-year bonds was the most important event. Some analysts believed that the future of the long-term bond market depended on this benchmark refunding.

Despite a tail of 0.8 basis points in the 10-year Treasury auction, the market showed resilience. The non-dealer share and bid/cover ratio were both below average, yet Treasurys remained undeterred. The auction result did not derail the ongoing bull flattening trend, which continued into the afternoon trading session in the United States. The bond market seemed to absorb the auction without sparking renewed concerns about oversupply, supporting the prevailing trend of lower yields, particularly in longer-duration assets.

The simple read is that the market appeared content to move past the supply event, as the tail in the 10-year Treasury auction wasn't substantial enough to reignite worries about oversupply that had triggered a repricing of the term premium. The recent soft economic data provided a more favourable macro backdrop for duration assets, contributing to the ongoing decline in yields. The market sentiment seemed to favour a resumption of the lower-rate environment, supported by the auction results and the broader economic context.

The proof is in the pudding, so they say, as 10-year yields fell near 4.50% following the auction. 30-year yields were the lowest in more than a month.

Tough year for stock bears

It's been quite the rollercoaster for equity bears this year. The anticipated earnings and economic recessions failed to materialize, banking sector turmoil became a rally catalyst, and a reversal in bond yields abruptly halted a potential market downturn. To add insult to injury, Microsoft hit a new record high, leaving some bears pointing fingers at OpenAI for their streak of bad luck in 2023.

And it’s not just a rates story. Uneven post-earnings performance aside, big tech results were generally acceptable. If not valuations, it isn’t apparent what the bear case is, and if yields are receding and the Fed’s done, the critical avenue for multiple compression is closed.

Getting a meaningful selloff in big tech will be challenging in the presence of lower real rates. 10-year reals are nearly 35bps lower from October’s highs.

Oil markets: I dare you to cut more mode

US crude oil prices have dropped to their lowest levels since late July. This is due to concerns about an unusually high build-up in commercial crude oil inventories. Additionally, fuel demand has been lagging behind its seasonal average, which has raised concerns about demand destruction.

According to the American Petroleum Institute's data, US crude oil stocks surged by 11.9 million barrels during the week ending November 3, significantly exceeding expectations for a 200,000-barrel increase. This would be the third-largest inventory build in the US this year if confirmed by the more definitive EIA report. Additionally, supply at the Cushing, Oklahoma, tank farm, which serves as the delivery point for West Texas Intermediate futures, increased by 1.1 million barrels.

Oil prices have faced steady downward pressure this week. This can be attributed to the vanishing Middle East risk premium and the global economic data that is showing a declining trend. The decrease in demand from China and the United States has led to hedge fund longs pulling out, intensifying the situation.

Perhaps the dagger to the heart for oil bulls was, according to Kpler data, OPEC+ net seaborne exports are exceeding forecaster expectations. Indeed, this constitutes a crucial bearish data point, potentially accounting for the sizeable visible inventory builds.

Several vital trends likewise display a softer tone, such as the softening prompt timespreads, the impact of unseasonably warm weather on oil demand, and the decline in net managed money positioning, all of which contribute to the overall weakness in the market.

So now it seems like traders are moving into " I dare you to cut more mode" after the Saudi energy ministry hinted that unilateral cuts could extend into 2024, ostensibly reflecting concerns about weaker demand.

From a macroeconomic perspective, the Saudis face enormous challenges to maintaining a price floor and incredible risks. By artificially keeping oil prices higher with China experiencing difficulties and consumers in developed countries cutting back, the possible intervention bounce in oil prices could exacerbate the issue by further reducing demand at the pump.

The fluctuations in oil prices make it an interesting example of an economic variable—even if we understand it, we don’t know it.