Stocks rally as bond bears dig in

Preview: US stocks hit fresh records, but Asia lags. Treasury yields sit near 24-year highs, and Ray Dalio warns the bubble is close to bursting.

Stocks at record highs – Asia fails to follow through

The S&P 500 has risen four days in a row, clocked a new record yesterday, and is up nearly 15% YTD. The Nasdaq Composite and Nasdaq 100 also wrapped up at all-time highs, while the Dow added a respectable 253 points.

Market breadth was reasonably healthy within the large-cap index, with 339 constituents rising against 163 falling. The rally had a distinctly tech-led flavour; Nvidia edged higher and moved closer to a US$6 trillion market capitalisation, helped by a robust revenue outlook and a record buyback.

Overnight in Asia, however, we have seen little follow-through action. The MSCI Asia Pacific benchmark has seen flat earnings revisions for a month, and memory-chip stocks have been soft ahead of Samsung's preliminary results due tomorrow. Interestingly, Taiwan is now favoured over Korea, thanks to its more diversified chip supply chain and, for the first time in about six quarters, stronger earnings upgrades.

Rates remain central risk

In fixed income – which remains the key risk to the equity story – US Treasury yields are hovering near a 24-year high, with the 10s reported at around 5.3% at one point during Asian hours. Drivers include the inflationary impulse from the US-Iran conflict, fiscal worries, and an AI-fuelled economy the Fed is trying to cool.

Interestingly, positioning data suggests the market expects yields to rise further, as OI in 10-year note futures has risen in most recent sessions.

Brent circling north of US$100

Brent is trading just north of US$100/barrel this morning, and Iran's recent attacks on tankers in the Strait of Hormuz have reignited supply concerns. Market participants are therefore grappling with how long the economy can bear elevated oil, rates and inflation.

Dalio’s bubble warning

That brings me to the morning's somewhat ‘cautionary note’. Speaking in Singapore, Ray Dalio described artificial intelligence as a ‘classic bubble’ and said we are approaching, though not yet at, the point of bursting. He pointed to heavy, debt-financed AI investment, rising borrowing costs and the need to convert paper wealth into cash, including through wealth taxes, as potential triggers. Time will tell how this one plays out, of course.

FOMC Minutes on deck

Regular readers already know I am not expecting much in the way of fireworks from the Fed minutes. You will recall that the Fed unanimously voted to raise the target rate by 25 bps to 3.75-4.00%, and that 16 of the 18 officials project at least one more rate increase this year. 

However, since the meeting, August PCE numbers have come in below expectations across the board. The September US employment report also hit the wires, with headline payrolls at 29,000, well below the market's median estimate of 90,000 and August's initial reading of 162,000. Additionally, several Fed officials have echoed a less hawkish, more cautious stance since the last meeting. New York Fed President John Williams moderated a governance conference yesterday, though he offered little on policy, clearly maintaining his view that there is no urgency to an October rate hike.