Markets

Rising government bond yields have put the brakes on the red-hot stock rally that’s driven major indexes to fresh records in recent days. After the S&P 500, Dow, and Nasdaq hit all-time highs on Monday, stocks cooled off slightly, with the S&P 500 logging its first post-Election Day dip—a day that had otherwise launched a roaring surge across equities and cryptocurrencies.

The thrill over a Trump return is palpable on Wall Street, where major indexes just wrapped up their best week of the year, inching even higher on Monday. Stock investors are riding high on the “Trump Bump ” , with visions of tax cuts and growth policies fueling economic optimism.

The bond market, however, is striking a more cautious tone. The yield on the 10-year Treasury climbed to 4.43% Tuesday, up from 4.31% on Friday, signalling inflation worries that some say could worsen under Trump’s anticipated policies. Many expect further upward pressure on bond yields, with more significant government deficits looming and, god forbid, a buyer strike.

If the 10-year Treasury yield takes aim at 4.60% in quick order, it could be the thread that unravels the bull market. Rising yields mean higher borrowing costs, tighter corporate margins, and a pivot toward safer, income-generating assets over stocks. A swift move to that level may not just dampen the equity rally but send a clear signal that any hopes of easy money are fading fast.

The Russell 2000 Index, the go-to barometer for small-cap stocks and the current market darling, is hitting a wall, struggling under the weight of soaring bond yields. Technically speaking, it's now butting up against resistance levels last seen in the stimulus-fueled highs of late 2021. Breaking through those highs would take a serious jolt of optimism—no easy feat in the current higher yield climate.

What makes buying any Index even riskier? U.S. equity positioning just shot to an 11-year high post-Trump election victory, meaning investors are loaded up on stocks and especially sensitive to any bad news. Even a whisper of negative sentiment can cause an outsized reaction when market exposure is this high. In this setup, technical hurdles and the potential for a market pullback converge, leaving investors on edge and ready to hit the sell button at the slightest whiff of trouble.

But in other corners, market euphoria remains strong. Bitcoin hit a fresh high near $90,000 on Tuesday, with retail investors pouring back into crypto ETFs launched earlier this year, underscoring the renewed risk appetite flooding the markets. After all, Bitcoin has increasingly become the go-to hedge against currency debasement, driven by a cocktail of forces. Since 2022, the landscape of escalating geopolitical tensions, persistent inflation worries, ballooning government deficits, and waning faith in fiat currencies—especially in some emerging markets—has fueled its appeal. Amid the noise, Bitcoin stands as a digital fortress, capturing the interest of investors looking to protect against the erosion of traditional money.

The wall of worry

If foreign buyers—who collectively hold $8.503 trillion in U.S. Treasuries as of August—decide to slow down their purchases or, worse, take the “nuclear option” by selling off some of their holdings in retaliation to trade tariffs, the aftershocks could be monumental. Imagine U.S. interest rates surging as demand for Treasuries falters and the dollar taking a nose dive as the ripple effect spreads globally.

All eyes are now on the Treasury Secretary appointment. With John Paulson, previously seen as a frontrunner, bowing out due to “complex financial obligations,” Wall Street feels slightly deflated. Investors are bracing themselves for what this new chapter could mean, especially if Trump’s policies lead to even more economic sabre-rattling on the global stage. One thing’s for sure—the stakes are high, and the next Treasury Secretary will be walking a tightrope with every policy move.

The repo squeeze

Quarter-end pressures are back in the spotlight as Treasury financing costs surge, with bond yields flashing amber warning lights that some say could soon turn red. Recent spikes in repo rates around quarter-ends hint at brewing tension, but New York Fed’s Open Market Account Manager Roberto Perli offers a calming take. According to Perli, while repo rate widening is raising eyebrows, it hasn’t yet made repo intermediation prohibitively costly, nor has it put money market stability at immediate risk.

In essence, QT (quantitative tightening) is still on track. Perli's reassurance suggests that while liquidity dynamics in the repo market are shifting, there’s no immediate threat of market disorder. But as QT continues, market watchers will keep a close eye on these quarter-end moves because if these “amber lights” turn red, things could get choppier fast.

Forex markets

Should read The China surplus has raised serious red flags, sparking a hedging spree among corporates and unhedged players alike—a rush that fed directly into the dollar's rally yesterday, fueled by a surge of options engagement. And it seems Trump is already off to the races with his lineup of China hawks, setting the stage for tariffs to land sooner rather than later, which supports the “Parity Party” playbook for the euro and a push toward 7.50 for the yuan.

But let’s zoom out a bit. Trade wars rarely start with fireworks; instead, there’s often a chilling silence on both sides.

Right now, we’re at key psychological levels—EUR/USD at 1.06 and USD/CNH at 7.25—that my FX peers are calling major make-or-break points. The million-dollar question: what counter-moves might Europe or China have up their sleeves? Let's hope it’s not the “ nuclear option” for US bonds.

Amid the tariff talk, there’s always a glimmer of hope that Trump’s business instincts (with maybe a nudge from Elon Musk, who has vested interests in China and Europe) could keep some diplomatic doors open. If Trump plays it pragmatic, the U.S.-China-Europe dynamic might just take a softer turn. But if not? The breaking point will eventually come. The PBoC and ECB could step in, slashing rates and unleashing stimulus to draw buyers back to Chinese and EU stocks.

For now, though, any light at the end of the tunnel looks more like a U.S. dollar freight train charging full speed ahead. Buckle up!

Oil markets

Crude oil prices saw a slight uptick today, with a tight physical market overshadowing some of the demand concerns weighing on sentiment. Brokers in Singapore report a buzzing prompt market, where buyers are snatching up any available cargo, boosting the Dated Brent benchmark. However, with forward dates hinting at a looming surplus, this prompt activity could be more noise than a lasting signal.

On the bearish side, OPEC has cut its oil demand growth forecast for 2024, adjusting it down to 1.82 million barrels per day from the previous 1.93 million, largely due to shaky economic conditions across key regions. But there’s also the bullish wildcard—the “hawk in the room.” Newly appointed Secretary of State Marco Rubio, known for his hardline stance on Iran and support for Israel, could bring a new layer of geopolitical tension to the energy markets. Heightened pressure on Iran could lead to supply disruptions, ramping up the stakes for oil traders navigating this volatile environment.

Oil prices will always be an unpredictable moving target, but looking ahead, the trend seems poised to head lower over the next year or two.

SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.

Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.

Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.

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