Morning Wrap: ASX 200 to rise, relief rally on Wall Street + What's next for bond yields?

Major US benchmarks continued to bounce after a volatile past couple of weeks, China's market rescue efforts fail as Xi holds back on stimulus, M&A activity begins to pick up across several sectors, Evergrande shares nosedive more than 80% as it resumes trading at 17 months, gold stocks set to rise as spot prices bottom, the rise of the zero date option and where could bond yields go from here?

Let's dive in.

S&P 500 SESSION CHART

S&P 500 choppy but higher (Source: TradingView)

MARKETS

• S&P 500 choppy but higher, closing off best levels

• Upbeat session reflects balanced messaging from Powell’s Jackson Hole speech, bond yield stabilisation, a pickup in M&A activity and a reset in positioning/sentiment indicators

• China stimulus flowing through including lower stamp duty on stock trades, restrictions on some share sales and lower deposit ratios for major financing – But continues to underwhelm market expectations

• Seasonality headwinds to emerge in September, which is historically the weakest month of the year for equities, down an average 1.56% since 1928 

• Treasuries lure buyers as juicy yields offset Powell warning (Bloomberg)

• Goldman Sachs says yen to retreat to 1990 levels if BOJ stays dovish (Bloomberg)

M&A

• China's Xpeng to acquire Didi's EV unit in deal worth up to $744m (Reuters)

• China's BYD buys US Jabil's mobility unit for $2.2bn (Nikkei)

• Global science innovator Danaher buys Abcam for US$5.7bn (Reuters)

• Commercial real estate investment trust Kimco to acquire RPT Reality in US$2bn all-stock deal (Reuters)

• Goldman Sachs to sell wealth-advisory unit to Creative Planning (Bloomberg)

• US FTC suspends challenge to block Amgen’s US$28bn deal for Horizon Therapeutics (Reuters)

CENTRAL BANKS

• Fed's Mester sees another rate hike, says cuts may have to wait (Reuters)

• ECB's Kazaks says he would err on side of raising rates (Bloomberg)

• BoE's Broadbent says rates need to remain high for some time (Bloomberg)

CHINA

• China halves stamp duty on securities transactions, lowers margin requirement for buying stocks to boost investor confidence (SCMP)

• Nomura says China's stamp-duty cut won't sustain stock rally (SCMP)

• China's 5.5% stock rally fizzles in blow to market rescue effort (Bloomberg)

• Evergrande shares plummet more than 80% as trading resumes after 17 months (BBC)

ECONOMY

• Japan to issue stimulus package as soon as September to boost the country's growth potential and counteract the downside risks of inflation (Nikkei)

• Australian retail sales beat estimates on Women's Wold Cup (Bloomberg)

• New Zealand cuts spending plans as downturn strains budget (Bloomberg)

Sectors to Watch: Gold and Resources

The market is starting to settle but is this the calm before the seasonally weak month of September? In terms of sectors to watch on Tuesday:

Resources: Relatively positive overnight session for all-things resources. US-listed BHP and Rio Tinto finished 1.6% and 1.7% higher respectively, the S&P Metals and Mining ETF rose 1.1%, Singapore iron ore futures continue to hover 1-month highs of US$113 a tonne and a few of the resource-related ETFs rose 1-2% overnight.

Gold: Gold prices are beginning to bottom from recent lows of US$1,880 an ounce, in-line with the recent peak in bond yields and the US dollar. While gold prices have been downtrending for quite some time, a few gold names have held up relatively well. This Emerald Resources (ASX: EMR), Bellevue Gold (ASX: BGL) and Ramelius Resources (ASX: RMS).

VanEck Gold Miners ETF (Source: TradingView)

How Far Will Bond Prices Fall (Or Yields Rise)?

The answer to this question has big ramifications for every asset class. Some shorter-dated bonds (i.e. bonds that mature in less than two years) currently bear yields that we haven't seen since 2006. All those bets at the start of the year that this year would mark a return for fixed income have been well and truly humbled. High yields mean low prices and, in the case of bond fund managers, lower returns.

The blame can be attributed to a few factors including:

• Interest rate hikes, which have extended longer than a lot of people expected

• Rate cut expectations have been pushed back to the second half of 2024

• Supply as the US bond market (the world's largest), has been issuing a lot of debt to pay down existing obligations. More supply for the same amount of demand naturally means lower prices

But ask market participants where they think prices will go and you'll get some varied responses. Capital Economics thinks "the 10-year Treasury yield will end the year well below its current level." Even though this environment has been very different to other times, as senior markets economist Thomas Mathews wrote last week:

"We think that falling inflation will give the Fed the confidence to cut next year by more than the market is anticipating. We [also] think growth will eventually falter; that might help partly unwind the rise in investors’ expectations for the neutral rate," Mathews said.

"We’re sticking for now with our forecasts for the 10-year Treasury yield of 3.25% and 3.00% by end-2023 and end-2024, respectively," he added.

For context, the Capital Economics team are expecting a 100 bps (1%) drop in the 10-year yield by the end of the year. That's a brave call considering the year-to-date low is 3.3% (it's currently 4.25%).

US 10-Year Government Bonds Yield (Source: TradingView)

Someone who disagrees with that call is veteran investor Bill Ackman. Ackman, who runs Pershing Square Capital, recently shorted very long-dated Treasury bonds (30-year bonds, specifically). Earlier this month, Ackman argued that long-dated yields had not recalibrated to a new normal of inflation staying at 3% (above the Fed's target). His argument is that higher-for-longer inflation could see yields rise even higher and stocks, as a consequence, being hit hard. So far, that bet has paid off tepidly.

US 30-Year Government Bonds Yield (Source: TradingView)

The Rise of the Zero Day Option

Since the pandemic, a particular kind of option has grown in popularity for its ability to be used in and around key data points. In 2017, zero day options made up just 6% of the entire options market in the US. It's now 43%.

The surge in bond yields (mentioned above) and whipsaw in equity markets has reportedly been a big reason why people are loading up on these instruments. Note that these options can be used as bullish and bearish bets on the index.

Source: Financial Times

And while institutional investors normally use options, they have also been growing among a certain crowd - the Reddit trading forums. And this line, which is taken from the same story as the chart, really stuck out to me.

"One self-declared “degenerate gambler” purportedly made $32,000 on Wednesday alone, though they admitted their tactic of buying bullish zero-day call options after a market dip was high risk: “Would not recommend”.

"Welcome to the democratisation of markets, I guess.

ASX corporate actions occurring today:

• Trading ex-div: HMC Capital (HMC) – $0.06, Mitchell Services (MSV) – $0.021, Worley (WOR) – $0.25, Bega  Cheese (BGA) – $0.03, The Lottery Corp (TLC) – $0.06, Regal Partner (RPL) – $0.05, Pengana Capital (PCG) – $0.01, MA Financial (MAF) – $0.06, Insurance Australia (IAG) – $0.09, Sunland Group (SDG) – $0.11 

• Dividends paid: None

• Listing: None

Economic calendar (AEST):

• 4:00 pm: Germany Consumer Confidence

• 5:40 pm: RBA Bullock Speech

• 12:00 am: US JOLTS Job Openings