HomeContributorsFundamental AnalysisCrude Oil Jumps, Dollar Rallies, Bonds Fall

Crude Oil Jumps, Dollar Rallies, Bonds Fall

The selloff in bonds continues on US government drama. The sell-off in US 10-year papers accelerated yesterday and the 10-year yield spiked to 2.64%. The 2-year yield however, which captures the expectations on Federal Reserve (Fed) actions remain steady a touch above the 5% mark, as even though the Fed’s once-dove-now-hawk Neel Kashkari said that the US may need more than one more rate hike to tame inflation, the looming government shutdown talks, the Detroit strikes and a few weak economic data released lately regarding the US melting savings and fading confidence hint that it may be ambitious to bet on more rate hikes before the dust settles. But you never know, the US will reveal its latest GDP update and it is expected to be revised higher. If that’s the case, we will likely see more choppiness in bond markets.

Volatility in US bond markets is rising, though we are far from alarming levels, while the US dollar continues to amass major safe haven demands. Nothing stands before the US dollar’s safe haven dominance. Gold slipped below the $1900 per ounce; rising yields increase the opportunity cost of holding the non-interest bearing gold, and thus, should keep a sustainable pressure on the precious metal even after the US government shutdown show ends, as the Fed remains sufficiently decided to keep rates higher for longer, and the US Treasury will be issuing more bonds, paying better yields in the next few months.

Energy and technology stocks helped the S&P500 limit losses yesterday. The energy sector was up on a fresh jump in oil prices after US inventories at Cushing and Oklahoma fell to critical levels, hinting at growing supply deficit in global energy space. AI stocks were up as US President Joe Biden said that he will sign an executive action on AI this fall, and Meta announced to introduce AI features in Instagram, Messenger, and WhatsApp. Earlier this week, Amazon announced to buy a $4 billion stake in Anthropic, similar to Microsoft’s creator of ChatGPT (which by the way is now valued at around $90bn, whereas it was worth $30bn at the beginning of this year). Amazon is also making a move into the AI’s magical world, aiming to give its AWS customers access to AI. Microsoft told investors in the latest earnings call that the AI would increase Azure’s revenue by around 2%, Anthropic should help drive similar revenue for AWS. Now, unfortunately for Amazon, investors didn’t react with the same excitement than they did with Microsoft’s investment in ChatGPT. Maybe a new DoJ probe was responsible for it, or it was just the rising yields. But somehow, Amazon follows its MAMAA peers with a certain lag, the e-commerce wing of the business is certainly responsible for that, in an environment full of worries regarding an imminent slowdown in spending.

Zooming out, the S&P500 remains under pressure. Despite insatiable appetite for AI, the rising yields threaten valuations. There is an important support zone near 4180/4200 region, which shelters the 200-DMA and the major 38.2% Fibonacci retracement on last year’s rally. If that support is pulled out, the index will step into a mid-term bearish consolidation zone, and selloff could deepen into yearend. In the short run, the risks remain tilted to the downside, as JP Morgan’s Hedged Equity Fund apparently holds tens of thousands of protective puts aimed to protect the long-stock product from selloff and volatility. Those put options will expire on Friday, and their strike price are said to be not far from the actual levels. If exercised, we could see an additional negative pressure on Wall Street stocks.

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