Morning Wrap: ASX 200 to extend selloff, Dow erases 2023 gain + US yields hit 16-year high

Major US benchmarks take another step down as US 10-year Treasury yields rally to the highest level since 2007, the S&P 500 falls to the key 200-day moving average, the Dow erases its year-to-date gains, US job openings unexpectedly rise amid a surge in demand for workers, CNN Fear & Greed Index hits 'Extreme Fear' and why this pullback might turn into a correction.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 falls to finish near worst levels (Source: TradingView)

MARKETS

• Major US benchmarks finished lower overnight, closing near worst levels

• S&P 500 falls to level not seen since June, Nasdaq on the verge of a 4-month low

• US 10-year yield rallies another 10 bps to hit 4.8% for a fresh post-2007 high

• Surging 10-year has lowered the 2-and-10 inversion to the lowest level of the year

• Path of least resistance continues to focus on the downside amid unrelenting bond yield rally, hotter-than-expected labor market data and inflation reacceleration risks 

• Dow erases 2023 gain, volatility spikes as rate angst spreads (Bloomberg)

• VIX spikes to levels seen during the US banking crisis back in March (Bloomberg)

• Treasury selloff has been detached from fundamental drivers (Bloomberg)

• Goldman joins Wall St peers flagging rates risk for stocks (Bloomberg)

• Yen surges from weakest level in a year amid intervention talk (Bloomberg)

• Blue-chip bond yields hit highest since 2009 while Fed teases hike (Bloomberg)

STOCKS

• Meta to charge users in EU for ad-free Instagram and Facebook (FT)

• Rivian Automotive produced 16,304 EVs in Q3, ahead of analyst estimates (CNBC)

• GM's third-quarter sales jump 21% as UAW strike slowly expands (CNBC)

CENTRAL BANKS

• Fed Mester says one more rate hike may be needed this year (Bloomberg)

• RBA extends rate pause at Bullock's first meeting (Bloomberg)

• ECB's Lane says maintaining current rates is the "base case" (Bloomberg)

• BoE's Mann says UK interest rates may remain permanently higher (Bloomberg)

• RBNZ seen delivering hawkish hold ahead of New Zealand Election (Bloomberg)

CHINA

• Global funds trim China equity exposure to lowest since 2020 (Bloomberg)

• China tourism revenue more than doubled over holiday weekend (Bloomberg)

ECONOMY

• US job openings post largest increase in two years (Reuters)

• UK retail inflation falls to lowest level in a year, industry data shows (FT)

The Art of the Pullback

Every good bull market has its odd correction or pullback. It's what keeps a market healthy. And besides, a theoretical profit is no good until you book said profit! (Which in itself is a good reminder. Book your gains people!)

But in case you haven't gotten in on some of the hottest stocks or thematic investments quickly enough, this chart from the Bank of America reminds you that time is on your side if you want to hold out that long.

On average, 5% pullbacks occur on the S&P 500 at least three times per year, 10% corrections occur on average once per year, and a deep 20% bear market tends to occur (on average) every three to four years. Of course, it's up to you to decide whether you think the pullback will lead to a correction then onto the bear market. But it's something worth thinking about given valuation is everything.

Source: Bank of America

Why This Pullback May Become a Correction

I've written about this ad nauseum on the Livewire website (sorry if you find it boring) but the bond market is such an important clue for where other asset classes may be going. The sell-off in bond markets this year has been akin to other years where inflation is public enemy number one. That is, bonds do not provide the portfolio protection it would in a normal market environment. And it's also true that bonds (and inverted yield curves etc etc) are a good indicator for financial accidents.

Take a look at this chart from BCA Research which proves this point. Every time yields have shot up, a major financial market event has had to occur in order for the bleeding to stop. And the longer that bond yields rally (and prices slump), the more equities and other risk assets are affected. And as BCA's Arthur Budaghyan has willingly admitted, good luck trying to call this top.

Source: BCA Research

Extremely Bearish or Contrarian Bullish

The US 10-year yield is up around 440 bps since March 2020. And as the above chart suggests, just about every move of this size has resulted in some sort of crisis. Given this, markets have held up relatively well. But something has to give. Will it be stocks or treasury yields?

This backdrop has caused CNN's Fear and Greed Index to fall to 'Extreme Fear'. A level not seen since March 2023 and October 2022. But from those two lows, the S&P 500 would finish 7-10% higher just one month later.

Source: CNN

Is it time to start plugging in some Warren Buffett quotes about "be fearful when others are greedy and greedy when others are fearful"? Or do bond yields continue to surge until something breaks?

ASX corporate actions occurring today:

• Trading ex-div: KMD Brands (KMD) – $0.02, Ridley Corp (RIC) – $0.04

• Dividends paid: CSL (CSL) – $2.00, Symbio Holdings (SYM) – $0.01, Southern Cross Media (SXL) – $0.02, Integral Diagnostics (IDX) – $0.03, Mader Group (MAD) – $0.03, HMC Capital (HMC) – $0.06, SOCO Corp (SOC) – $0.005

• Listing: None 

Economic calendar (AEST):

• 8:00 am: Australia Ai Group Industry Index

• 12:00 am: US ISM Services PMI