Asia wrap: Stocks are still overshadowed by bonds

At present, stocks are somewhat overshadowed as all attention is still focused on the bond market. And correctly so, significantly ahead of this week's US auction

Equities are playing second fiddle as Treasury bonds are unquestionably the primary drivers, with the S&P 500 merely tagging along for the ride.

The rapid and substantial rally in the bond market, initiated by the Treasury's refunding announcement and continuing without interruption through the release of the payroll data, allowed US stocks to register their most impressive performance in a year.

A similar weekly rally in US equities occurred when yields dropped significantly, notably after the release of the October 2022 CPI report exactly a year ago this week. During that week, 10-year yields declined by 35 basis points. Last week, they fell by 27 basis points, leading to another notable equities rally. So we are talking about a watershed movement here, folks.

Whether the recent rebound in bonds can be sustained holds significant implications. This week's bond auctions will play a crucial role, and the upcoming CPI release later this month will be decisive significantly, as it might eliminate the possibility of another rate hike entirely.

Both bond and stock investors were caught looking away positioned for 30-year Treasury yields of around 5.5%, rather than the current 4.5%

As we approach year-end, we must consider how traders' profit and loss (PNL) positions will affect their willingness to take risks and whether the "everything rally" can continue. The closing calendar can influence traders' decisions.

The same applies to those looking to capitalize on the opposite side of the market. Leveraged funds and macro traders would require available profit and loss (PNL) to take advantage and fade this move.

But for me, it all comes down to this week's auction results and any surprises CPI has in store.

Oil markets are in wait-and-watch mode

Oil prices nudged higher in early Asian trade on Monday as the broader US economy remains in an economic sweet spot, allowing the Fed to remain on pause. But with China's economic data still "breaking bad" and a relative dearth of US economic data, Asia macro could drive the Oil bus this week.

Still, traders will likely remain uncomfortably perched on the Middle East headline risk teeter tooter and very much in wait-and-watch mode.

Some speculators may have been encouraged to buy the recent dip, or at least take profit, after major suppliers Saudi Arabia and Russia announced their intention to maintain ongoing supply reductions until the end of the year, signalling tighter oil markets. Although, with oil prices trading well off the recent highs, this isn't a surprise. Hence, it is unlikely traders will consider this a call to rally, but it could firm the base up a bit.

In the meantime, crude markets may continue nursing steep losses as traders reevaluate mostly forward and unquantifiable  Middle East risk premiums, given prompt fears of supply disruptions in the Middle East that have yet to materialize.