(Bloomberg) — Asian shares fell for a second day as Wall Street stocks took a breather from their longest weekly rally this year. Bonds tumbled as expectations of Federal Reserve rate cuts cooled.
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Stocks in Australia, Japan and South Korea all fell, while futures for benchmarks in Hong Kong pointed to losses. That’s after US stocks fell from near-overbought levels following a brutal run to record highs.
US 10-year yields rose 11 basis points to 4.20% as traders priced in a slower pace of monetary policy easing. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, said he favors a slower pace of rate cuts given uncertainty about how low the U.S. central bank should ultimately cut rates. Australian and New Zealand bonds fell in early trade.
A host of factors are driving the bond sell-off, including supply concerns and better U.S. economic data, Chris Weston, head of research at Pepperstone Group Ltd., wrote in a note. US election betting is also weighing on the market, with traders “at risk of a ‘Red Sweep,’” he said, referring to the possibility of Republicans taking over the White House and Congress.
“The trend up is growing legs,” he said.
In Asia, the focus remains on Beijing’s efforts to boost growth in the struggling economy through stimulus measures. In the latest move, Chinese banks cut their key interest rates after an easing by the central bank in late September, as part of a series of measures aimed at halting the housing market slump.
Japanese traders are keeping a close eye on the run-up to next weekend’s elections. Support for Prime Minister Shigeru Ishiba’s governing coalition continues to decline, suggesting the vote could lead to a weakened and unstable government.
Wall Street faces a major earnings hurdle this week, with about 20% of S&P 500 companies expected to report, as traders brace for key results from Tesla Inc. to Boeing Co. and United Parcel Service Inc.
The latest Bloomberg Markets Live Pulse survey shows that respondents consider corporate America’s performance more important to stock market performance than who wins the November election or even the Federal Reserve’s policy path.
Nvidia Corp. reached an all-time high, with the Nasdaq 100 rising 0.2%. The Russell 2000 retreated 1.6%. Homebuilders went under. United Parcel Service Inc. fell after a sell recommendation at Barclays Plc. Boeing. gathered after a provisional agreement with the workers’ union.
In another sign that greed has trumped fear, the S&P 500 hasn’t suffered back-to-back losses in about 30 sessions. While a month without consecutive bad days may not seem like much, the current streak is among the very best since 1928, according to data compiled by SentimenTrader.
The S&P 500 with all its major groups fell 0.2%, but technology fell. The Dow Jones Industrial Average fell 0.8%.
“The index remains overbought over multiple time frames and is still vulnerable to short-term profit-taking,” said Dan Wantrobski, research director at Janney Montgomery Scott.
Protection
Volatility for options on stocks, bonds and currencies has increased as investors pay for protection. The risks are clear: hotly contested US elections, interest rate decisions in the US and Europe, the threat of a broader conflict in the Middle East and quarterly figures. In the stock market, implied volatility exceeds actual swings, and sell-off protection is favored over bullish calls.
According to Miller Tabak’s Matt Maley, regardless of the reason, “we certainly can’t blame investors for buying some protection in the options market and/or gold.”
“With the stock market being so expensive (especially on a price-to-sales basis), it is much more vulnerable than normal when these types of political and geopolitical issues became major concerns in the past,” he said.
This week, Tesla in the US is likely to face questions on its earnings call about production targets and regulatory challenges, after the unveiling of its much-hyped Cybercab failed to excite investors and allay concerns about recent car sales. Boeing will also have to mollify investors increasingly concerned about production delays, labor disputes and depleted financial resources.
“Unlike the dotcom bubble, today’s leading technology companies have solid fundamentals, but the market is far from ‘normal’,” says Nationwide’s Mark Hackett. “High expectations are warning signs of possible instability in the coming years. Investors should prepare for moderating returns and volatility, especially as cracks begin to appear after 2024.”
Main events this week:
Christine Lagarde of the ECB is interviewed by Bloomberg Television on Tuesday
Andrew Bailey of BOE and Klaas Knot and Robert Holzmann of the ECB speak at the Bloomberg Global Regulatory Forum in New York on Tuesday
Philadelphia Fed President Patrick Harker speaks Tuesday
Tariff decision Canada, Wednesday
Consumer confidence in the eurozone, Wednesday
Sales of existing homes in the US, Wednesday
Boeing, Tesla, Deutsche Bank earnings, Wednesday
Fed’s Beige Book, Wednesday
US new home sales, unemployment benefits claims, S&P Global Manufacturing and Services PMI, Thursday
UPS, Barclays earnings, Thursday
Beth Hammack of the Fed speaks Thursday
U.S. Durable Goods, University of Michigan Consumer Confidence, Friday
