The previous week saw the 10-year US Treasury yield nearing a significant 5%, which led to a decline in stocks due to its record correlation with the . The current scenario suggests that both stocks and bond prices are falling in unison, driven by concerns over prolonged interest rates and term premium. This comes as investors consider factors such as the long-term inflation outlook, bond supply, and government spending plans.
The ACM model indicates that the term premium is at its highest since 2008. While some market observers attribute this term premium shift to the rise in yields, others argue that the 10-year and 2-year yields are closely linked and tend to peak together.
Despite the rising bond yields, there is potential for upliftment in the stock market. Earnings reports from tech giants Microsoft (NASDAQ:), Alphabet (NASDAQ:), Meta (NASDAQ:), Amazon (NASDAQ:), Apple (NASDAQ:), and Nvidia (NASDAQ:) are due for scrutiny this week. These companies, known for their higher P/E ratios, make up a significant portion of the S&P 500’s market value. Their performance could influence the direction of the broader market.
Meanwhile, long-position investors are capitulating as bond prices decline with surging yields. The recent yield surge interestingly was not followed by a USD rally, suggesting a potential short-term peak for the currency.
In addition to these developments, several key economic data points are expected in the coming days. These include US durable goods orders and preliminary October PMI reports for the UK, Eurozone, and the US. The week will also see September’s core PCE report from the US, which is the Federal Reserve’s preferred measure of inflation.
On the international front, the European Central Bank (ECB) is expected to maintain its current status this week. Geopolitical tensions continue to drive up gold prices, adding another layer of complexity to global financial markets. As investors navigate this intricate landscape, the upcoming earnings reports and economic data releases are likely to play a critical role in shaping market trends.
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