US 10-Year Treasury Yields Approach 5%, Putting Stress on Risk Assets

  • The US 10-year Treasury yields are inching closer to the 5% mark, causing increased pressure on risk assets.

Disconnect Between DXY and Yields Persists

  • Despite efforts, DXY has not aligned with the movement in yields, and this disconnect is evident in price action.

Equities Struggle with Key Support Levels, Focusing on Yields and the VIX

  • Equities made an attempt to breach key support levels in overnight trading, with a primary focus on yields and the VIX.

The Ongoing Focus on Treasury Yields

Today, the financial markets continue to closely monitor the US 10-year Treasury yields as they edge closer to the 5% threshold. This ongoing climb in yields, which reached a new cycle high last night, has added further pressure to risk appetite. While there was a slight improvement in last night’s 20-year bond auction compared to the previous week’s 30-year auction, it was not sufficient to halt the ascent.
Equities are currently facing a two-fold challenge. First, the risk-free rate is approaching 5%, diminishing the attractiveness of risk assets. Additionally, the VIX has failed to reach new lows and remains elevated, contributing to persistent market uncertainty. Both of these factors do not bode well for short-term equity returns.
Another intriguing element in the current financial landscape is the behavior of the US dollar (USD), which appears to have disconnected from Treasury yields following last week’s increase in the Consumer Price Index (CPI). This divergence might be attributed to positioning that is preventing the DXY from aligning with rising yields. However, it is expected that this gap will eventually narrow, whether upward or downward.

Commodities in the Spotlight

Commodities are maintaining their prominence in the financial world, largely due to the prevailing geopolitical situation. Although the surge in oil prices following Iran’s call for an oil embargo has cooled down, OPEC has shown no interest in the proposal. Meanwhile, gold continues to receive strong support after breaking through its 200-day moving average (DMA) with force.

Currency Markets Update

In the foreign exchange market, the Swiss Franc (CHF) is leading the major currencies in an upward trajectory, driven by safe-haven flows and potential intervention by the Swiss National Bank (SNB). On the other end of the spectrum, the Australian Dollar (AUD) is the weakest among the majors, following a disappointing Australian jobs report, which revealed a contraction of 40,000 full-time jobs.

Key Events to Watch Today

Today’s session presents several key highlights to keep an eye on. These include the release of the Philly Fed Business Index, Initial Jobless Claims data, and a speech by Federal Reserve Chair Jerome Powell. Trading the Philly Fed Business Index and Initial Jobless Claims data could be tricky. A significant miss in the data might lead to a decline in the USD, which has struggled to keep pace with rising yields. However, chasing the USD higher on positive numbers may not be advisable.
Additionally, a substantial beat in the data could trigger further declines in US equities, as it could propel Treasury yields closer to the 5% mark, thereby increasing pressure on equities.
Another critical event to watch is Federal Reserve Chair Powell’s speech scheduled for 15:00 UK time. In recent sessions, a significant number of Fed officials have hinted at a pause in November, as they believe that the current movement in yields is already doing much of the work for them. Therefore, a potentially more dovish tone from Powell later today could act as a saving grace for risk assets. If he confirms the possibility of a pause and suggests that interest rates may have peaked, this could provide relief for equities and lead to a decline in yields and the USD.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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