Asian markets fell for the second consecutive day, as Wall Street paused its longest weekly rally of the year. Investor concerns over bond yields and the Federal Reserve’s monetary policy triggered a broad selloff across global markets, with shares in Australia, Japan, and South Korea dropping. Meanwhile, futures for Hong Kong’s stock benchmarks signaled further declines, reflecting investor caution. This came after US equities fell from near overbought levels following an unprecedented rise to all-time highs.
US 10-year Treasury yields surged by 11 basis points to 4.20%, as traders scaled back expectations of aggressive Federal Reserve interest rate cuts. Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, highlighted the growing sentiment among central bank officials to approach interest rate reductions with caution. Schmid pointed to uncertainties about how low the US central bank should ultimately cut rates, suggesting that a slower pace of cuts might be appropriate. As a result, the bond markets reacted swiftly, with both Australian and New Zealand bonds falling in early trading.
The global bond selloff has been driven by several factors, from concerns over bond supply to better-than-expected US economic data. According to Chris Weston, head of research at Pepperstone Group Ltd., the bond market faces numerous pressures. Among them is growing speculation over the upcoming US elections, which many traders believe could result in a so-called “Red Sweep,” referring to the possibility of the Republican Party gaining control of both the White House and Congress.
Weston noted in a research note that traders are positioning themselves ahead of the election by betting on increased bond market volatility. The potential for Republicans to influence fiscal policy, especially tax cuts and government spending, has heightened concerns about long-term debt and inflation, further contributing to the market’s fragility.
“The trend higher [in yields] is growing legs,” Weston wrote, underscoring the persistence of upward pressure on bond yields.
In Asia, attention remains squarely on China’s struggling economy, as Beijing continues to roll out measures to stimulate growth. In a bid to halt a prolonged slump in the housing market, Chinese banks recently lowered their benchmark lending rates. This move followed a series of rate cuts by China’s central bank in September, signaling Beijing’s commitment to shoring up economic activity.
Despite these efforts, sentiment across Asian markets remains cautious. Investors are still wary about the overall health of China’s economy, with many doubting whether Beijing’s latest measures will be enough to reverse the downward trend in growth.
Japanese markets are also facing their own set of challenges, with investors keeping a close watch on the country’s upcoming election. Support for Prime Minister Shigeru Ishiba’s ruling coalition has weakened in recent weeks, raising the possibility of a less stable administration following the vote. Should the ruling party lose significant ground, it could introduce more uncertainty into Japan’s already fragile economy, potentially exacerbating volatility in the region’s financial markets.
As global equities decline, Wall Street is preparing for a significant earnings hurdle this week, with around 20% of S&P 500 companies scheduled to report quarterly results. Among the most closely watched names are Tesla Inc., Boeing Co., and United Parcel Service Inc. (UPS), whose earnings and forward guidance could have substantial implications for market sentiment.
Tesla, in particular, will face scrutiny during its earnings call, with investors eager for updates on production targets and regulatory hurdles. The company’s recent unveiling of its Cybercab failed to generate the excitement Tesla had hoped for, raising concerns about its ability to meet future sales targets. Meanwhile, Boeing continues to grapple with production delays, labor disputes, and financial strain, all of which have raised red flags among investors. UPS, on the other hand, faces headwinds after a recent sell recommendation from Barclays Plc., which saw the stock tumble.
Despite these challenges, certain sectors of the US market continue to show resilience. Nvidia Corp. hit a record high, boosting the Nasdaq 100 by 0.2%. However, small-cap stocks represented by the Russell 2000 index struggled, dropping 1.6%. Homebuilders also faced a selloff, with concerns over rising mortgage rates and slowing home sales weighing on the sector.
The S&P 500 has demonstrated remarkable resilience, avoiding back-to-back losses for 30 consecutive sessions. While this month-long streak of no consecutive down days may seem unremarkable, it is among the longest runs in the index’s history, according to data compiled by SentimenTrader. Since 1928, few periods have seen such persistent upward momentum.
However, some market experts are warning that the index remains vulnerable in the short term. “The index remains overbought across multiple time frames and is still vulnerable to profit-taking over the short run,” said Dan Wantrobski, director of research at Janney Montgomery Scott. The S&P 500 has surged to record highs in recent weeks, fueled by optimism over corporate earnings and expectations that the Federal Reserve may slow the pace of interest rate hikes. But with volatility rising and uncertainties growing, there is concern that the rally may soon run out of steam.
Amid rising risks, volatility is surging across the board, with options on stocks, bonds, and currencies all reflecting heightened investor anxiety. Implied volatility, a measure of expected market swings, has outpaced actual volatility, indicating that traders are bracing for further disruptions. Investors are increasingly favoring put options—contracts that provide protection against a market selloff—over bullish call options.
According to Matt Maley, chief market strategist at Miller Tabak, it is not surprising that investors are seeking protection in the options market and other safe-haven assets like gold. “With the stock market as expensive as it is (especially on a price/sales basis), it is much more vulnerable than usual when these kinds of political and geopolitical issues became significant concerns in the past,” Maley said.
The risks are numerous: a hotly contested US election, interest-rate decisions by the Federal Reserve and European Central Bank, and the possibility of an escalation in conflicts across the Middle East. With these factors in play, investors are hedging their bets, preparing for the possibility of increased market turbulence in the coming months.
As the week progresses, Wall Street will focus on the earnings reports from key companies, which could shape the broader market’s direction. Tesla’s production targets and regulatory challenges will be under the microscope, while Boeing will need to address investor concerns about its ongoing struggles with production delays and labor issues. The outcome of these earnings reports could significantly impact market sentiment, particularly if the results fall short of expectations.
Mark Hackett, chief of investment research at Nationwide, has warned that while today’s leading tech firms have strong fundamentals, the market is far from stable. “Unlike the dot-com bubble, today’s leading tech firms have solid fundamentals, but the market is far from ‘normal,’” Hackett said. He cautioned that high expectations are potential warning signs of instability in the coming years, urging investors to brace for more moderate returns and increased volatility as “cracks begin to appear beyond 2024.”
Hackett’s sentiment is echoed by other market analysts, who believe that the current environment—characterized by elevated valuations, rising bond yields, and geopolitical risks—calls for caution. Investors should prepare for a potentially more volatile market, particularly as political and economic uncertainties grow more pronounced.
