The Overnight Report: US Credit Concerns

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US markets weakened after regional banks sparked further concerns over credit quality while gold continued its seemingly relentless move higher.

After setting a new record index level yesterday on softer than expected unemployment data, the ASX200 looks set to open lower, mirroring Wall Street.

Good Morning,

The ASX200 hit new record high on Thursday post a surprise rise in the unemployment rate, boosting market pricing for rate cuts from the RBA.

The market ended up 78pts or 0.9% to 9,068 with real estate and financials leading while tech and utilities were weaker.

What happened overnight, NAB Markets Today Research

Australia’s labour market report was the key local event, with employment rising by 15k, slightly below expectations but the unemployment rate jumping two-tenths to 4.5%, its highest in nearly four years.

The data prompted markets to price in a full -25bp RBA rate cut by December, with the 3-year bond yield falling as much as -13bps. The RBA is now expected to remain cautious, awaiting further clarity from upcoming CPI data before making policy moves.

After a solid start to the day with tech stocks leading on the back of news of TSMC’s second upgrade to its 2025 revenue growth forecast, sentiment soured in the afternoon following news two regional banks disclosures of significant loan issues, reigniting fears about credit quality in the sector.

Zions Bancorp sank -12% after a -US$50 million charge-off, while Western Alliance Bancorp dropped -10% on collateral concerns. The volatility in regional banks, combined with the recent collapse of subprime lender Tricolor Holdings, has investors questioning the broader health of US credit markets. 

The S&P500 closed down -0.63%, with financials the worst-performing sector down -2.75%, and the Russell2000 lost -1.46%. AI optimism provided some early support but was ultimately overshadowed by the negative banking headlines. The NASDAQ closed down -0.47%.

The negative equity vibes triggered a rally in US Treasuries. The 2-year yield fell by -8bps to 3.41%, after trading to an early high of 3.51% and a low of 3.40%. The 10-year yield closed the day at 3.97%, down -5bps on the day and one bps above its intraday low. 

Traders ramped up bets on more aggressive Fed easing, with over two full rate cuts now priced in by year-end and some positioning for a possible -50bps move at either the October or December meetings. The market now prices -54bps of cuts by December, up from yesterday, as the risk-off mood and weaker data (more below) reinforce expectations for policy support.

Federal Reserve commentary was a mixed bag but consistent with recent trends. Speaking to Bloomberg Governor Waller advocated for a cautious approach to rate cuts, favouring -25bp increments and a “wait and see” stance.

In contrast, Stephen Miran pushed for a larger, -50bp reduction, citing urgency to support the labour market. Richmond Fed President Barkin struck a more hawkish tone, expressing confidence in the underlying strength of employment and inflation dynamics, while Kansas Fed President Schmid reiterated the need for further work to bring inflation down.

US data releases painted a mixed picture. The NAHB housing market index surprised to the upside, rising 5pts to a six-month high of 37, though it remains subdued by historical standards. Conversely, the Philadelphia Fed business index plunged to a six-month low of -12.8 in October, reversing last month’s strong reading. Notably, the prices paid components in both the NY and Philly Fed surveys rose, suggesting persistent cost pressures.

The ongoing US government shutdown has delayed key official data, leaving markets to piece together the economic outlook from private sector indicators. Bloomberg highlighted a little-known index pointing to equity market cautiousness, the latest American Association of Individual Investors survey showed that bullish sentiment dropped to 33.7% in the week ending Oct. 15 from 45.9% in the prior period.

In the UK, monthly GDP figures met expectations with a modest 0.1% m/m gain in August, following a similar decline in July. Economists now expect Q3 growth of just 0.2% q/q, half the pace anticipated by the Bank of England last month, highlighting the fragile state of the UK economy.

French political news brought some relief, as Prime Minister Sebastien Lecornu survived two no-confidence votes, clearing the way for budget negotiations.

French government bonds rallied on optimism that a budget deal may soon be reached, with the 10-year yield falling to its lowest since mid-August (closing at 3.33%) and the OAT-Bund spread narrowing to levels last seen in late August. Italian bonds also rallied, while German bunds (2.57%) paused after a four-day run.

European equity indices were mixed, with the Eurostoxx 600 up 0.69%, the DAX gaining 0.38%, and the FTSE 100 rising 0.12%.

Currency markets saw the AUD as the worst performer, dropping below 0.65 after the labour market report revealed a surprise jump in unemployment to 4.5%. Just before the labour market data release, the AUD traded to an intraday high of 0.6516, the currency attempted a recovery late in our day and after a choppy session overnight (intraday low of 0.6471) it now starts the day at 0.6483.

Commodities saw gold surge to a new record, up 2.47% to US$4,280/oz, buoyed by safe-haven demand and expectations of further Fed easing. Silver, platinum, and palladium also advanced, while oil prices continued to slide, with Brent down -1.36% to US$61.07 and WTI off -1.39% to US$57.46. Industrial metals were mixed, with aluminium and zinc higher but copper and lead weaker.

Elsewhere, geopolitical tensions remain elevated as the US seeks to build a coalition with allies —including Australia, Canada, India, and European democracies— to counter China’s aggressive moves on rare earth supply chains.

Overnight Japan and Germany signaled support for a coordinated response.

Meanwhile, President Trump and President Putin are set to meet in Budapest to discuss ending the war in Ukraine, with high-level staff talks scheduled ahead of the summit.

S&P500 and Gold price racing towards US$10,000 by 2029? Ed Yardeni, Yardeni Quicktakes

We first began writing about our Roaring 2020s scenario in 2020. So far, so good. Both the S&P 500 and the price of gold have been roaring ahead to new record highs this year. We wouldn’t be surprised if both hit 10,000 by the end of the decade. 

The stock price index and the gold price have exhibited an inverse cyclical correlation, but their long-term upward trends have been remarkably similar. The ratio of the two has fluctuated around 1.7. They appear to converge and become equal every 10-20 years, although the data are limited because the price of gold was fixed until President Richard Nixon stopped pegging it in 1971.

We believe that the S&P500 can reach 10,000 by the end of the decade, driven by strong earnings growth assuming that there’s no recession in the interim. We do assume that, in light of the economy’s remarkable resilience since the start of the decade.

The economy did experience a recession, lasting just two months, during the pandemic lockdowns in early 2020. But its short duration amid extreme pressures attest to the economy’s underlying resilience: When the lockdown restrictions were lifted, ongoing social distancing restrictions didn’t stop the recovery.

Nor did global supply-chain disruptions, which triggered a spike in inflation, forcing the Fed to tighten monetary policy significantly in 2022 and 2023. Similarly, the economy continued to grow this year despite the stressors of Trump Tariff Turmoil, the recent government shutdown, and labor shortages.

For the S&P500 to get to 10,000 by the end of 2029 with a 22.0 forward P/E, our best working assumption would require that forward earnings per share rise to US$455 by the end of that year.

We think that is a realistic outlook. More questionable is our 22.0 valuation multiple assumption. However, we expect plenty of lift from the Magnificent-7. They currently account for a record 32% of the S&P500’s market capitalization and sport a forward P/E ratio of 29.3. We assume they’ll remain magnificent and continue to earn an outsized valuation.

The S&P500’s valuation multiple can remain historically high as long as the market consensus is that a recession is unlikely, as we’ve been contending since the lockdown recession. A recession scenario would be bearish, with both earnings and the valuation multiple taking hits

What could end the remarkable rally in gold? The easing of geopolitical crises might do so. There might be some willingness by governments to rein in their fiscal deficits. Good luck with both of those. 

What if the Trump administration decides to sell the gold held at Fort Knox to pay off some of the US government’s debt? The US Mint claims that its gold reserves total 248 million ounces. At US$4000 per ounce, it would be valued at US$992 billion. That’s a drop in the bucket of the US$37 trillion in US public debt. 

It’s also small relative to above-ground world gold stocks. The World Gold Council estimates that the total above-ground gold in the world totaled 6.95 billion ounces at the end of 2024. That would be worth approximately US$28 trillion at the current gold price.

Corporate news in Australia

-Oaktree is back in debt renegotiation talks with Star Entertainment Group ((SGR)).

-National Australia Bank ((NAB)) looks like the only buyer of HSBC Australia’s retail business.

-Orian is selling  $600m in Capstone Copper ((CSC)) shares after Hadrian Capital Partners sold its stake for $688m. 

-Ord Minnett and Canaccord Genuity have launched a global IPO roadshow for Advanced Energy Minerals, a producer of high-quality alumina.

-Radiopharm Theranostics ((RAD)) is aiming to raise $35m at 3c per share with a further $5 through a share purchase plan.

-ASIC apparently did not inform Equity Trustees ((EQT)) about its concerns around Shield Master Fund after it informed Macquarie Group ((MQG).

-Firmus Technologies has signed an initial $4.5bn agreement with Nvidia and local data centre company CDC Data Centres ((IFT)) to build Ai factories and fit CDC with its cooling software.

-Eroad ((ERD)) has flagged an impairment up to -NZ$130m due to challenging conditions in the US market.

On the calendar today:

-EZ Sept CPI

-US Sept Building permits (suspended)

-US Sept Housing starts (suspended)

-US Sept Industrial Prod’n (suspended)

-AUSTRALIAN FINANCE GROUP LIMITED ((AFG)) AGM

-CLINUVEL PHARMACEUTICALS LIMITED ((CUV)) AGM

-F.F.I. HOLDINGS LIMITED ((FFI)) ex-div 12.5c (100%)

-RPMGLOBAL HOLDINGS LIMITED ((RUL)) AGM

-SILEX SYSTEMS LIMITED ((SLX)) AGM

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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