Impossible to ignore the material move higher in 10y UST yields. 4.73% on the 10y UST is its highest level since late 2007. Three take-ways from me on this:
- The Fed doesn’t have to hike rates – the market is doing it for them for free. Higher yields and a stronger USD$ are key ingredients for tighter financial conditions and that’s where we are today. When financial conditions get this tight, something’s gotta give.
- My bet on what “might give” is growing as yields rise and the USD goes higher. #1 US office space real estate, #2 US and global high yield debt, and #3 emerging market equities (hyper allergic to a higher USD$ now top my list. #1 is a consensus call and won’t come as a shock to many/any. #2 is just a direct victim of higher yields and declining credit liquidity. When you get a recession that’s where all the defaults happen. We will continue to stay away from HY credit. #3 is a new one but emerging markets are suffering from weak fundamentals and now a very strong USD$. Don’t be surprised if an EM currency cracks first. The good news is that EM valuations are already very, very, very cheap – that’s a good place to add to risk when it starts raining volatility.
- Sentiment has weakened and markets technical now look soft. It’s been a rough couple of weeks for technicals. The chart below says it all: the percentage of stocks in the S&P500 trading above their 200 day moving average is at its lowest point in 15 months. Markets are ripe for pullbacks when technical are soft and sentiment is weak. Not the end of the world – but reset near term expectations. Markets don’t often spend much time with so few stocks trading below big important technical levels, but when they do volatility comes. Market technicals must be respected.
The best thing for the market right now is a weak ISM prices paid number on Wednesday and a soft jobs report on Friday. I can’t believe I just typed that but it’s true. “Soft” or “weak” now means “good”.
Source: Bloomberg and JonesTrading LLC as of October 2, 2023
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