Market snapshot: rotation towards bonds continues as reporting season moves into top gear

The rotation towards bonds continued, with equity investors under pressure from any number of angles.

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Escalating tensions in the Middle East and Treasury yields topping 5% for the first time since just prior to the great financial crisis are currently burdens which equity markets are finding difficult to bear. The ongoing strength of the latter also impacts on the broader economy as it is seen as a benchmark for borrowing levels. As such, both businesses and individuals are impacted and indeed the 30-year mortgage rate in the US reached 8% last week, to levels not seen this century. At the same time, higher yields are providing an attractive alternative to equities and are also being fed by further concerns that the US central bank may yet have one more interest rate hike up its sleeve.

The “higher for longer” rhetoric, which has been emanating from the Fed, will be tested once more this week, with the release of both third-quarter GDP and the latest Personal Consumption Expenditure, the preferred inflation measure. In the event of either or both numbers beating expectations comfortably, the likely equity reaction would be negative in the face of the possibility of more monetary tightening.

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In the meantime, the quarterly reporting season moves into top gear, with a whole range of large US corporates providing updates. Among these are numbers from most of the “Magnificent Seven”, which have driven gains in the US market this year. Alphabet (NASDAQ:GOOGL), Amazon.com Inc (NASDAQ:AMZN), Meta (NASDAQ:META) and Microsoft (NASDAQ:MSFT) will all update investors and are coming up to a high bar of expectations given the excitement which has accompanied the rise of AI and its profitability potential.

The indices most influenced by the mega-cap tech stocks are still comfortably ahead this year, with the Nasdaq up by 24% and the S&P 500 by 10%. The more traditional Dow Jones index has, however, succumbed to the recent selling pressure and is now down by 0.1% so far this year.

Asian markets fared no better overnight as sentiment remained skittish. Quite apart from the factors which have been weighing on US markets, Chinese stocks have also come under increasing selling pressure. International investors have been leaving the region given the toxic mix of a beleaguered property sector, ailing consumer sentiment, high youth unemployment and rising geopolitical tensions, and with stimulative measures from the authorities failing so far to reignite the recovery.

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In the UK, the premier index drifted at the open, with some weakness in the oils and miners reflecting both a stabilising oil price and another shift towards a generally risk-off approach. The negative move in early exchanges has now wiped out any gains for the year, with the FTSE 100 down by 0.8%. The FTSE 250, meanwhile, has borne the brunt of negative overseas investor sentiment and is now lower by 9.6% in the year to date.

This week will also see a raft of third-quarter reports, with the UK banks taking centre stage. Barclays (LSE:BARC) will kick off the season tomorrow, with investors keeping a close eye on the group’s US investment bank, where the likes of Morgan Stanley (NYSE:MS) are currently suffering given the lack of dealmaking activity, in areas such as M&A and IPOs. Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) will also report, with the potential for further bad debt provisions clouding sentiment. The banks have tended to be cautious ahead of any possible consumer deterioration, and there are also questions over whether the recent interest rate hike boost may have started to taper off. Standard Chartered (LSE:STAN) is also due to update investors, with its Asian exposure proving pivotal to its performance, and with hopes high following a 16% rally in the share price this year.