Asia open: Yield relief
|Markets
US stocks are showing resilience, trading higher despite ongoing volatility in interest rates and a lack of significant scheduled macroeconomic data. Still, investors appear to be gearing up for a busy earnings week.
After an initial move down in stocks at the New York Open -- alongside the pre-open jump in Treasury yields, 10-year yields back-peddled on Monday after rising above 5 percent for the first time in 16 years, providing some breathing room for stocks.
Indeed, this shift in attitude comes alongside a sharp move in rates, with yields on 10-year US Treasuries now down 7bps on the day to 4.85%. Perhaps today's trading is best captured by the VIX -- down a bit to 19.6 as investors are tentatively shaking off some worst-case Middle East risk aversion scenarios priced in via the oil channel, which reduces pent-up inflation angst.
Today's trading action will also likely take a back seat to what we see later in the week when investors have more concrete news on which to press the buy and sell buttons. And as we look out over the next 2 weeks, we focus on GDP, rates, and earnings.
Oil markets
Oil prices are considerably lower to start the week as production in the Middle East region remains unaffected by the turmoil in Gazza. At the same time, International leaders, including US and European allies, are actively engaged in diplomatic efforts to contain the ongoing conflict and prevent the situation from escalating into a broader regional conflict. And they are providing a ray of hope that cooler heads will prevail. Hence, some geopolitical risk built-in in time spreads has started to seep out.
All the while, merger mania continues to take the US O & G industry by storm after Chevron agreed to buy Hess.
Chevron and ExxonMobil, two major U.S. energy companies, have taken a different approach from some European counterparts in their investment strategies. While European energy majors like BP and TotalEnergies are significantly increasing their investments in renewable energy sources as they transition away from fossil fuels, Chevron and ExxonMobil are betting heavily on the long-term resilience of oil and gas demand. These global oil giants are unlikely to acquire these US interests to keep oil in the ground.
Forex
Most Fed members suggest that the recent increase in long-term Treasury yields could be a substitute for additional rate hikes, which carries significant negative implications for the US Dollar. When monetary policy is expected not to respond to robust data with higher short-term interest rates, the currency's responsiveness is lessened. Hence, The US dollar (USD) may run out of Fed Fuel as 2-year yields shift lower in response to last week's Fed messaging.
While third-quarter growth in the US appears strong, there is growing uncertainty about the future, given the various challenges and uncertainties in the current environment.
Considering this, Thursday's US GDP is likely a look-through for currency markets.
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