Treasury yields and USD surge, stocks and gold sink

Headlines

* US factory gauge contracts at slowest pace in nearly a year

* US 10-year Treasury yield reaches 16-year high as bond rout continues

* Oil drops below $90 on macro gloom, high interest rates

* Gold extends fall as strong dollar, higher US rates take toll

FX: USD made fresh highs after the quarter and month-end weakness last week. Better than expected ISM manufacturing data helped while JP Morgan Chief Jamie Dimon said the economy is “still ok”. Yields surged north again to new multi-year highs with the 10-year at 4.69%. The DXY is overbought and into its twelfth straight week of gains, but US exceptionalism is front and centre. The 50% mark of the late 2022 decline sits above at 107.17.

EUR fell to new y-t-d lows at 1.0480 on broad-based dollar buying. German-US yield spreads are widening further. There are several ECB speakers this week including President Lagarde. Vice-President de Guindos dismissed talks of imminent rate cuts on Monday. The oil surge would “make our task more difficult” he said. Markets have virtually priced out any more ECB rate hikes for this cycle. Further downside may test the next major level of support at 1.0408.

GBP fell sharply and closed on it slows at 1.2091. It is now only very marginally up on the year versus the greenback. There is little UK data out this week. Fridays weak finish, similar to EUR/USD, points to a continued bearish outlook. A test of 1.21 and then 1.20 seems self-fulfilling in the current environment.

USD/JPY made a new top at 149.87 which is an 11-month high. Is 150 the line in the sand for Japanese authorities to intervene？ We will find out soon. The October 2022 high is 151.94. Surging 10-year yields are fuelling the rally. US economic resilience continues to force markets to cement the higher for longer rates theme.

AUD and NZD struggled and dipped below 0.64 and 0.60 respectively. Markets have half an eye on the central bank meetings this week. But no major changes are expected from either. USD/CAD is trading around previous strong resistance and the April and September peaks around 1.3667. We get Canada jobs data on Friday. But markets are focused on the dollar leg right now.

Stocks: US equities pared gains through the session as bond yields hit levels not seen since 2007. This came in the wake of Congress avoiding a government shutdown and strong PMI data. The benchmark S&P 500 added 0.01% to settle at 4288. The tech-heavy Nasdaq finished 0.83% higher at 14,837. The Dow underperformed, falling 0.22% to settle at 33,433. Tech was given a helping hand by Goldman Sachs who put Nvidia on their “conviction” buy list. It called the company “the principal ”shovel supplier in the AI gold rush. The bank also says that strong upcoming earnings results could reverse the decline in megacap tech stocks. The Magnificent Seven (APPL, MSFT, AMZN, GOOG, TSLA and META) has dropped 7% in the last two months, while the S&P 500 has lost 3%.

Asian futures are in the red following the mixed Wall Street handover. APAC stocks traded mixed to kick off the quarter. Numerous markets are closed due to Chinas Golden week. The Nikkei 225 opened above 32k boosted by the weak yen and encouraging Tankan survey. But the index pared gains.

Gold was down for a sixth day. The last similar losing streak was in August 2022. The precious metal lost nearly 4% last week as real yields continued to climb higher. That puts pressure on the non-yielding asset. Managed-money net long futures positioning is now the lowest since early March. Gold ETF holdings have seen 18 consecutive weeks of declines.

Day Ahead – RBA to keep rates at 4.10%

The RBA is fully expected to leave rates at 4.10% for a fourth month in a row. It will be the first rate decision under the new Governor Bullock. Her appointment was widely seen as one of continuity. Recent data releases support the case for a pause. Outsized job gains were nearly entirely down to part time jobs. Monthly inflation data printed in line with expectations, picking up to 5.2% from 4.9%

But that wont prompt any action ahead of the more comprehensive Q3 inflation update later this month. The bank will likely say a hold in rates will provide further time to assess the impact of the increase in rates to date. Uncertainty remains high with China woes and household consumption in focus.

Chart of the Day – AUD/USD threatening a breakdown

The aussie has been trying to build a base around 0.64 in recent weeks. That comes after its steep sell-off in the summer due to the deteriorating China outlook and higher US rates. But any push up to 0.65 has been greeted with solid selling. Last Friday‘s bearish inverted hammer candle was a classic example. Last week’s low is at 0.6331. Any dovish noises from the RBA may be seized upon and see a breakdown. Next major support is below 0.63. A more hawkish central bank may get faded as the dollar shines.