A look at the day ahead in U.S. and global markets from Mike Dolan
Partly unwinding pre-weekend safety hedges related to the Middle East conflict, world markets are back focused on some critical macro priced levels and milestones that may once again define the week.
The beginnings of some aid convoys to Gaza and no fresh escalation of the war there at the weekend at least saw crude oil and gold prices back off their latest highs on Monday.
But in keeping with that retreat from havens, U.S. Treasuries and sovereign bonds everywhere resumed their decline and 10-year U.S. benchmark borrowing rates finally moved up through the 5% level for the first time in 16 years early on Monday.
The dollar retained its bid as a result and continued to probe the 150 yen level many suspect the Bank of Japan will be keen to protect against with open-market yen buying. But the buck did slip back on the euro as the European Central Bank meets this week to assess its 10 interest rate hikes over 15 months.
The ongoing anxiety in the bond markets, however, prevented a return to risk assets more broadly and stocks continued to fall around the world first thing on Monday, with China's blue-chip CSI300 index dropping to its lowest in 4-1/2 years as the property bust there continues to smolder.
Geopolitical angst is never far from the surface in China. Shares of Foxconn Industrial Internet slumped 10% on reports its parent Foxconn, the Taiwan-based firm which is a major supplier of Apple (NASDAQ:AAPL)'s iPhones, was the subject of tax audits and land use probes in China.
What's more, U.S. bonds now enjoy the biggest 10-year yield advantage against China in 21 years at some 226 bps and Goldman Sachs (NYSE:GS) estimated capital outflows from China spiked to $75 billion last month, the biggest monthly figure since 2016.
The U.S. tech sector more broadly is front and center of this week's third quarter earnings diary on Wall Street - with Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) reporting on Tuesday, Meta on Wednesday and Amazon (NASDAQ:AMZN) on Thursday.
But even these megacaps are still in thrall to the worrying squeeze in U.S. bond markets and the breach of the 5% threshold on 10-year tenors on Monday.
After a slew of speeches last week, Federal Reserve officials are in a traditional blackout period ahead of their Nov. 1 policy meeting.
But even though Fed officials appear to have convinced futures markets that they are likely done in their rate hiking campaign, that's been of little solace to the long end of the bond market curve - now arguably as worried about rising debts, deficits and soaring interest servicing costs.
That's seen the 2-10-year yield curve gap narrow to as low as 12 basis points - the least inverted that curve has been since July 2022. Both the 2-to-20 and 2-to-30 year curves are now back in positive territory.
What's more, the slightly amorphous 'term premium' - a risk premium demanded by investors for holding long-term bonds to maturity as opposed to just rolling over short-term debt securities - hit close to 50bps for the first time since 2015, according to the New York Fed's flavored model.
In Latin America, Argentina's sovereign dollar-denominated bonds fell by up to 4 cents to the dollar after Economy Minister Sergio Massa emerged as the surprise frontrunner following weekend elections. U.S.-listed shares of Banco BBVA (BME:BBVA) Argentina were also down 4.3% pre-market.
The ruling Peronist coalition smashed expectations to lead the results, setting the stage for a polarized run-off vote on Nov. 19 between Massa and libertarian radical Javier Milei.
In Venezuela, industrial engineer Maria Corina Machado declared victory overnight in the Venezuelan opposition's presidential primary, after she tallied a huge portion of votes with the count just over a quarter finished.
In deals, Chevron (NYSE:CVX) said on Monday it will buy smaller rival Hess in a $53-billion all-stock deal, just weeks after rival Exxon (NYSE:XOM) made a $60 billion offer for Pioneer Natural Resources (NYSE:PXD).
Key developments that should provide more direction to U.S. markets later on Monday:
* U.S. corporate earnings: WR Berkley, Brown&Brown, Cadence Design (NASDAQ:CDNS), Packaging Corp of America, Alaexandria Real Estate
* Chicago Fed Sept national business survey
* Bank of Israel policy decision
* World Trade Organization holds ministerial meeting in Geneva
* U.S. Treasury auctions 3-, 6-month bills
(By Mike Dolan, editing by Susan Fenton mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)