Leading technology companies Microsoft (MSFT.O) and Alphabet (GOOGL.O) are poised to divert the attention of global investors away from the recent bond market rebound. However, Alphabet’s positive performance has significantly uplifted market sentiment in anticipation of major earnings announcements scheduled for the week.
Waiting for Important Reports
Two major technology companies are set to release their financial reports this week. On Tuesday, Meta, formerly known as Facebook, will announce its earnings after the market closes. The following Wednesday, Amazon will also share its financial performance. Investors and analysts eagerly await these updates to gain insights into the companies’ recent activities and overall health.
The collective weight of these four stocks in the S&P500 index (.SPX) stands at an impressive 23.4%, slightly below their peak of 24% during the pandemic and twice the proportion they held a mere six years ago.
Propelled in part by the current surge in interest surrounding artificial intelligence, the large technology companies have undeniably contributed to the year-to-date increase of 10% in the overall S&P500. According to recent data, the index has experienced a decline of 3.6% year-to-date on an equal-weighted basis in 2023.
The Problems of Bond Markets Remain Relevant
In recent months, there has been a significant decline in bond markets, leading to a decrease of approximately 12% from their peak levels this year for megacap indexes such as .NYFANG. This squeeze in bond markets has been ongoing since midyear, causing notable fluctuations in the market.
The recent occurrence of 10-year Treasury yields surpassing 5% marks a significant milestone not witnessed in the past 16 years. This development has generated a sense of unease among market participants. However, as the trading session progressed, the apprehension subsided considerably due to the emergence of bond buyers willing to secure yields above the threshold.
The cause behind the unexpected 10-year retreat on Monday remains unclear, although it aligned with significant investors suggesting the closure of short positions on Treasuries.
In a recent statement, billionaire investor Bill Ackman revealed that he has taken measures to mitigate his previous positions against Treasuries. Ackman’s decision was based on his anticipation of a potential decline in U.S. economic indicators and the belief that the ongoing Gaza conflict would redirect a significant portion of investor funds toward U.S. government bonds.
In a surprising turn of events, the price of oil experienced a decline following the weekend. This coincided with the release of hostages and the arrival of aid convoys, which sparked a glimmer of hope for a potential temporary ceasefire in Israel’s military response in Gaza. Interestingly, this decline in oil prices positively impacted bond markets, leading to a rebound in their performance on that particular day.
In a broader context, sovereign debt prices experienced a boost on Tuesday due to indications of increasing strain on global business activity caused by escalating borrowing expenses, geopolitical tensions, and economic challenges faced by China.
Business activity in the eurozone experienced an unexpected decline this month, as demand weakened across the region, according to early “flash” surveys conducted in October. In a recent development, the euro has experienced a significant decline after reaching its highest point in the past month.
The upcoming release of sister surveys for the United States is expected to provide contrasting insights.
New data reveals that the labor market in Britain experienced a decline in its inflationary momentum during the three months leading up to August. This development could assist the Bank of England maintain the current interest rates in the upcoming week while also causing a decrease in gilt yields.
Optimism in Futures and Bond Markets Persists
In a notable development, U.S. stock futures are poised to experience a surge before the market opening on Tuesday. This positive trend is also reflected in Asian and European stock exchanges, which are currently in favorable territory. Furthermore, bond markets have shown signs of stabilization, contributing to the optimistic outlook. The Vix (.VIX) volatility index experienced a decline, dropping below the 20 mark after reaching a seven-month high of 23 in the preceding trading session.
The ten-year U.S. Treasury yields have remained steady at approximately 4.83%, around 19 basis points lower than the peak observed on Monday at 5.02%. The U.S. dollar index (.DXY) experienced a rebound from its lowest level in a month and is currently trading higher for the day.
The upcoming week will witness the evaluation of market interest in U.S. government bonds through Treasury auctions. On Tuesday, an auction for $51 billion worth of 2-year notes will occur, followed by a sale of $52 billion in 5-year notes on Wednesday. Lastly, on Thursday, the auction will involve $38 billion worth of 7-year notes. These auctions serve as a crucial indicator of demand for U.S. government paper.
In another market, the FTSE 100 index in Britain experienced a decline as shares of Barclays, a UK-based lender, dropped by nearly 7%. This decrease occurred after Barclays revised its full-year guidance on net interest margins despite surpassing expectations for quarterly profits.
In euro zone banking, UniCredit (CRDI.MI) experienced a notable increase of 1.8%. This surge came as the Italian financial institution revealed a third-quarter profit that surpassed expectations, with a substantial rise of 36% compared to the previous year.