2023-10-22 11:53:03
Will bonds suffer their third annual loss in a row?
Prepared by: Hisham Mukhana
The increasing volatility in US stocks and Treasury bonds is prompting investors to look for safer havens that are popular with them and can withstand the storm, despite their infrequent and declining value this time.
This comes at a time when the VIX volatility index recorded; It is the first and main measure of stock market fluctuations and a measure of investor sentiment on Wall Street, its highest level in nearly seven months. With the S&P falling 2.4% last week, and about 8% since late July, although the benchmark index is still up 10%, year to date.
Bond disruption
US government bonds are on track to incur a third consecutive and unprecedented annual loss, with yields on standard 10-year Treasury bonds, which move inversely with prices, reaching their highest levels, exceeding the 5% barrier, for the first time since 2007, before… It declined slightly, which led to investors crowding in queues for other traditional safe havens, such as the dollar and short-term debt, in addition to gold, which has surged by 8% since the outbreak of the conflict in the Middle East, to touch the $2,000 per ounce barrier.
“It is undoubtedly a challenging environment for diversified investment portfolios,” said Angelo Corkavas, chief investment strategist at Edward Jones. “But we still have a safe-haven asset class that is welcoming to investors, and which still provides more of a hedge than other volatile major names.”
Legitimate concern
Investors have plenty of legitimate reasons for their growing concern; The rise in bond yields has weakened the appetite for risk, thus raising the cost of capital for companies and enhancing investment competition within stock markets. Not to mention Federal Reserve Chairman Jerome Powell’s indication, on Thursday, that a stronger US economy will require a tougher policy. In addition, a weaker-than-expected earnings report for electric car maker Tesla clouded the public mood. We must also not forget the fears of the expanding conflict in the Middle East, which has led to increased levels of anxiety and anticipation in the markets.
“When interest rates are rising at the rate they are, and the geopolitical situation is tense as they are, volatility is the only thing you see,” said Brent Kochoba, founder of options analytics platform Spotgama.
Avoid risks
In addition, this week’s calendar will be crowded with companies’ quarterly reports and profits, led by four of the seven major giants who increased S&P’s gains this year, namely “Microsoft”, “Alphabet”, “Amazon”, and “Meta”. ».
The defensive sectors of the index itself suffered a blow this year, with utilities declining by about 18%, basic consumer goods falling by 9%, and health care by approximately 6%, partly due to the rise in yields on Treasury bonds, which weakened their attractiveness and turned the attention of some investors. to short-term Treasury securities or money market funds.
UBS analysts recommended hedging against this new state of uncertainty, and the consequences of the expanding conflict in the Middle East, by taking long-term positions on Brent crude. To protect against bond market volatility, these experts prefer five-year bonds, compared to 10-year ones, to earn more returns and mitigate the risk of 10-year bond yields continuing to rise.
In currencies, the Japanese yen stands at its lowest level against the dollar in about a year. In contrast, the Swiss franc, a long-time safe-haven asset, has risen near its highest level against the euro since 2015. The dollar has also risen by 5% in the past three months. US money market funds also saw inflows worth $640 billion for 2023, according to LSEG data.
The most important economic events of the week:
Monday
Company results: “Cleveland Cliffs”, “Simpson Manufacturing”, “Cadence Bank”, “Cathay General Bancorp”, “Northeast Bank”, “Imperial Petroleum”.
Tuesday
Corporate results: “Microsoft”, “Alphabet”, “HSBC Holdings”, “Visa”, “Coca-Cola”, “Verizon”, “General Electric”, “Barclays Bank”, “UBS Bank”, “ 3M, General Motors, Spotify, Snap, Pent Air, PacWest
9:00 Standard & Poor’s Case-Shiller home price report
09:45 S&P Services PMI
09:45 S&P Manufacturing PMI
Wednesday
Company results: “Meta”, “Boeing”, “CME”, “Banc Santander”, “Moody’s”, “Baker Hughes”, “Thermo Fisher Scientific”, “T-Mobile”, “Canadian Pacific Kansas”.
10:00 New Home Sales
Thursday
Company results: “Amazon”, “Shell”, “MasterCard”, “Comcast”, “Total”, “Intel”, “Lloyds Banking”, “Ford”, “United Parcel Service”, “Pioneer Natural Resources”, “ Hershey, Royal Caribbean, Southwest Airlines
08.30 GDP for the third quarter
08:30 Initial unemployment claims
08:30 Durable goods orders
08:30 Advanced trade balance in goods
08:30 Advanced retail and wholesale stocks
10:00 Pending home sales
Friday
Company results: “Exxon Mobil”, “Chevron”, “Colgate”, “Southern Copper”, “Natwest”, “Phillips”, “Imperial Oil”, “Fortis”
08:30 Personal income and spending indicators
08:30 Personal consumption expenditures index
10:00 Consumer optimism and confidence index
Note: US Eastern Time
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