Global stock markets faced significant declines on Thursday, as investors grappled with concerns surrounding the ongoing Middle East conflict and the substantial rise in 10-year Treasury yields, marking the largest one-week increase in 18 months. These developments occurred in anticipation of remarks from Federal Reserve Chair Jerome Powell and a day filled with corporate earnings reports.
Investors currently find themselves navigating two conflicting themes within the market. On one hand, there is the expectation of persistently high interest rates over an extended period. On the other, there is the geopolitical uncertainty generated by a significant conflict in the Middle East.
The anticipation of no immediate rate cuts by the Federal Reserve has propelled 10-year Treasury yields to nearly 5%, a level not seen in 16 years, while simultaneously exerting downward pressure on equities. Simultaneously, investors have turned away from bonds as a safe-haven asset and are showing a preference for gold, which is currently trading at a two-month high.
Complicating matters is the ongoing third-quarter earnings season, with major companies such as TSMC, the world’s most advanced chip maker, Philip Morris, Blackstone, and Fifth Third Bancorp all reporting on Thursday.
The MSCI All-World index, which represents global shares, declined by 0.25% on the day, reflecting a 0.9% drop in Europe’s STOXX 600 and weakness in Asian equity markets.
U.S. Treasury prices fell for a fourth consecutive day, causing the yield on the 10-year note to rise by an additional 6 basis points to reach 4.962%. This puts it on track for a weekly increase of 34 basis points, marking the most substantial one-week rise since April 2022.
Traditionally, during periods of uncertainty, investors turn to bonds as a safe-haven option. However, the current environment is characterized by rising interest rates and an influx of debt supply about to enter the market in the coming weeks, leading to alternative dynamics. According to Frederik Ducrozet, Head of Macroeconomic Research at Pictet Wealth Management, “The risk premium is clearly playing out more in gold and the U.S. dollar than in bond yields.” He emphasized that “It’s very much supply and demand and ‘higher for longer.’
This situation underscores the differences in the current landscape. Even in the face of regional, if not global, conflict, U.S. Treasuries do not exhibit the typical safe-haven demand.
U.S. stock index futures saw a decline of approximately 0.2%. Tesla shares fell 4.6% in pre-market trading after the company reported a drop in gross margins for the third quarter. In contrast, Netflix shares rose nearly 13%, attributed to a surge in subscriber numbers in key markets during the third quarter.
The pivotal event of the day, however, is Powell’s speech on the economic outlook before the Economic Club of New York. According to a Reuters poll of economists, the Fed is expected to keep interest rates unchanged when it meets on November 1, with a growing number of analysts forecasting no rate cut until the second half of 2024. Shane Oliver, Head of Investment Strategy and Chief Economist at AMP, anticipated that Powell would “hedge his bets in this environment” and reinforce the view of “higher for longer.