S&P 500 Futures Trying To Stabilize

Oil prices and global bond yields remain the dominant overnight market focus. Brent holds near $101/bbl as US-Iran hostilities intensified and supply concerns deepened. Asian equities weakened, with the Nikkei down 0.5% and the Hang Seng down 1.3%, while the UK 10-year yield reached 5.29%, the highest since 2007. European data reinforced the inflation tension: German CPI accelerated to 2.9%, driven by a 10.5% rise in energy prices, while Italian industrial production rebounded 0.7% m/m. The ECB is expected to hike 25 bp, taking the deposit rate to 2.50%. Today’s U.S. focus is PPI, followed by jobless claims, Treasury’s buy-back program, and a $22 billion 30-year Treasury auction.

STOCK INDEX FUTURES

S&P 500 futures are trying to stabilize, but $100 oil and a 10-year Treasury yield near 4.85% are wearing down investor confidence which could soon become rotation from stocks to bonds. In fact, some broker dealers are touting TIPS which we would consider to be sign of concern for stocks and inflation. The S&P 500 fell for a third consecutive session on Wednesday as higher energy costs reinforced inflation concerns and rising bond yields increased the hurdle rate for equities. The S&P 500’s modest decline understated the deterioration beneath the surface. The index fell 0.48% yesterday, but only 20% of S&P 500 stocks advanced, while the median stock lost roughly 0.9%. Small caps were even weaker still, with the Russell 2000 down 1.3%. Observed rotation is also unfavorable: selling broadened across most sectors and high-duration growth stocks, while isolated strength in mega-cap names and semiconductors helped disguise the underlying weakness. This is no longer simply an oil-sector rotation; rising Treasury yields are increasingly pressuring equity valuations across the market.

CURRENCIES

The dollar is failing to benefit from the surge in U.S. yields, an important sign that higher rates alone are no longer enough to attract dollar buyers. The Dollar Index has weakened as investors weigh rising U.S. inflation risk against increasingly hawkish policy abroad. Another key issue undermining the Dollar is the Treasury Secretary threat to hold US rates down with substantial buybacks as that clearly looks to slow the ascent of US rates relative to Japan, Europe and the UK. If there were a surprise ceasefire or Peace Deal the Dollar would really plunge. The Euro has been on the stronger side of the trade, holding 1.164 ahead of the ECB decision. Eurozone inflation accelerated to 3.3% in August, giving the ECB reason to tighten, but today’s 25-bp increase is already essentially priced.

TREASURY FUTURES

The Treasury market is rejecting the bond buy-back policy because the size of the buyback was not judged to be large enough to send a strong message to the market, especially with  inflation and fiscal fundamentals working against the Treasury Department. The Treasury’s announcement that it would buy as much as $6 billion of 10-20 year debt failed to stop the price selloff, amounting to less than 1.4% of the 20 and 30-year bond issuance expected in a year. The markets tend to challenge intervention threats especially when the Treasury Secretary talks big but carries a little stick. Brent above $100 reinforced the inflation threat and the 10Y yield reached 4.85%, the highest yield since 2023, while the 30Y moved above 5.3%. The failure of the supportive buyback announcement to lower yields confirms that the market is demanding greater compensation for inflation, supply, and fiscal risk.

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