The Overnight Report: Bond Markets Jitters

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Rising long term bond yields, emanating from the UK, France and Germany, and tariff uncertainty led to European and US equity markets selling off overnight.

After a second day of selling on the ASX yesterday, SPI futures are pointing to another weak start today.

Good Morning,

Selling pressure continued on Tuesday with the ASX200 closing down -0.2% to 8,898.1 with losses across most sectors, offset by gains in large miners and with gold stocks rallying to new highs.

What happened overnight, NAB Markets Research Extract

Pressure is mounting on UK Prime Minister Keir Starmer and Chancellor Rachel Reeves to restore investor confidence in the government’s budget, with a GBP35bn fiscal hole looming. 

The rout in UK long-dated bonds reflects waning demand from traditional buyers and concerns over structurally higher inflation. Then with foreign holders of UK debt, the combination of higher rates and a weaker currency is not a good combo either. 

The UK 30-year yield rose to as high as 5.72%, before closing the session up 5bps to 5.69%. The 10-year rate also rose 5bps, to 4.80%. For reference, the 30-year rate got as high as 5.66% during the 2022 Liz Truss sell-off, although the speed of selling pressure in that episode was more worrisome when yields surged more than 60bps over a couple of trading sessions.

The selloff in UK gilts extended to European bonds (French OAT 10yr up 4.6bps to 3.581%, 10yr Bunds up 3.8 to 2.783%). France is facing its own pressure due to political instability and worries about the size of the fiscal deficit, while a long-planned reform of the Dutch pension system, which transitions to a new system from 1-January, is causing some nervousness in that market. 

The respected ECB Governor Schnabel’s call for steady interest rates, saying policy may be mildly accommodative, and inflation risks were tilted to the upside didn’t help European bond market sentiment either. The flash CPI revealed annual inflation in the eurozone ticked up to 2.1% in August, against the prior and expected 2%. The core rate, which excludes energy, food, alcohol and tobacco prices, was stable at 2.3% year over year, but was higher than the consensus estimate of 2.2%.

After a long weekend, US investors were in no mood to lean against the rude awakening from Europe. US Treasuries yields rose across the curve, up between 3–5bps.The 30y Bond traded to an overnight high of 4.9966% before ending the day 4.4bps higher at 4.96% while the 10y gained 4.4bps to 4.26%. 

A mid-session bid proved short lived with the market showing renewed signs of anxiety amid expectations of heavy corporate debt issuance with investors also wondering what happens to the US fiscal position/UST supply if tariffs are eventually deemed illegal by the Supreme Court.

The European and US equity market board is a sea of red with the move up in yields as well as negative seasonality fuelling the negative vibes. The Eurostoxx600 closed -1.58% lower with the German Dax the biggest outlier, down -2.29%. 

Tech stocks led the decline in the US (S&P500 down -0.7% and the Nasdaq off -0.8%) with Nvidia falling for a second day (down nearly -7% in two sessions) on China sales restrictions, while Apple slipped amid an AI staff exodus. TSMC’s US-listed shares dropped -2.3% after the US revoked a key export waiver. 

Moving onto currencies, the USD was broadly firmer, with the Dollar Index up 0.6%. GBP was the weakest G10 currency, down -1.1% to 1.3393, as fiscal concerns weighed. The AUD managed a slightly better performance, falling -0.56% to 0.6520. 

Ahead of today’s Q2 GDP release, the latest partials suggest a mixed picture for Australia’s growth. Net exports are set to add 0.1ppt to GDP, with export volumes outpacing imports, while public demand fell -0.4% QoQ, contributing nothing to growth. Inventories will add less than previously expected, but this is offset by a slightly stronger net export contribution. 

NAB leaves its Q2 GDP forecast unchanged at 0.3% QoQ and 1.4% YoY, below the RBA’s August Statement on Monetary Policy forecast of 0.5%/1.6%, respectively. The outlook is supported by firmer consumer momentum, as evidenced by strength in consumer-facing real total sales and solid growth in travel imports, but public demand remains a drag after being a key support through 2024.

In other economic news, the US ISM manufacturing index rose to 48.7 in August (from 48.0), but remains in contraction for a sixth straight month. New orders provided a bright spot, jumping to 51.4, but production and employment remain subdued. Prices paid for raw materials fell to their lowest since February, suggesting some easing in tariff-induced cost pressures, but manufacturers remain cautious amid ongoing uncertainty.

Oil prices rallied, with Brent up 1.5% to US$69 and WTI up 2.6% to US$65.66, as US Treasury Secretary Bessent signalled tougher Russia sanctions could be coming, tightening the oil outlook. Congress is weighing tariffs of up to 500% on Russian energy buyers, and OPEC-Plus is expected to keep output steady. Gold surged to a record US$3,569/oz (up 2.4%), while silver also jumped. 

Finally in tariff news, despite tariff tensions, both the US and India signalled willingness to keep the door open to trade talks. President Trump claimed India offered to cut tariffs to zero, while India’s Commerce Minister confirmed ongoing dialogue, though no formal negotiations are underway.

Seasonality or something else? Steve Sosnick, Interactive Brokers extract

Can we blame scary seasonality for today’s declines, or might the blame lie elsewhere?  As with most things market-related, the explanation incorporates several factors. Global bond woes, renewed tariff confusion, and nascent concerns about a government shutdown are all weighing on today’s mood. But we’ve seen investors shrug off similar concerns before. Today’s activity reflects a somewhat unexpected return of risk aversion.

There is indeed truth to the “September Scaries”, but data show that a decline in September is far from pre-ordained.  Yes, September is statistically the worst month of the year for the S&P500. It is only one of four that show net declines over the past 25 years, but it is by far the worst. (According to Bloomberg data, January has averaged -0.19% this century; February -0.46%, June -0.25%, and September 1.51%). 

Yet over that period, the likelihood of a September decline is only slightly greater than that of a coin flip: 12 of the past 25 Septembers have seen positive returns for S&P500.  Furthermore, last September brought a positive 2.02% return, though it broke a nasty five-year losing streak for the benchmark. 

While seasonality is far from foolproof, it does feel as though there was a reassessment of traders’ attitudes toward risk today.  Markets of course rely heavily upon investor psychology, meaning that enough of them believe that something will occur, then it can become self-fulfilling. 

It would not be surprising if investors became more reflective about the balance between risk and reward as they perceive that the year is closer to its end than beginning. This year so far has been a wild but generally satisfying ride for most investors in US equity markets. After a nasty period of risk aversion this spring, dip buying and risk assumption became the lifeblood of the subsequent rally. It is not abnormal for investors to question the longevity of that approach.

And yes, there were some valid reasons for a reassessment about the balance between risk and reward. After Friday’s close, we learned that a federal appeals court struck down the President’s use of emergency powers to justify the administration’s tariffs, but left them in place until October 14th. 

Considering that stocks rallied even as the tariffs took shape and were then implemented, one could assert that markets had begun to prefer clarity about tariff policy to the uncertainty that prevailed before. The court ruling might prove favorable to many companies, but uncertainty-loathing markets just received a significant dose. 

Notably this morning, we saw the initial absence, then the subsequent failure, of sustainable dip buying. Most of us in the US awoke after the long weekend to see modestly lower overnight stock index futures. That itself reflected a lack of bargain hunting after Friday’s decline, but the selling accelerated as the morning wore on. 

It seemed as though every few minutes brought another round of drops. There were a couple of attempts at bargain hunting, with a more sustained bounce shortly after the US open but those were all extinguished rather quickly. Instead, we see S&P500 plumbing new lows as I type this shortly before noon EDT.

We also see S&P500 giving back the post-Jackson Hole rally. Even though rate cut expectations priced into CME futures improved slightly today, they still remain well below the highs that prevailed prior to Powell’s speech. (That said, expectations are more robust on ForecastEx, with a 7% “yes” bid for a -50bps cut in September). Things seemed to be all about rate cuts recently, though less so today.

Here’s one other thing to keep in mind: perhaps the seasonality might have more about the date than the month. We have seen -1% selloffs become relatively rare, and when I checked for the last occurrence, I noticed that the prior one was on the first trading day of last month, when S&P500 fell -1.6% on August 1st. Interestingly, S&P500 fell -0.11% on July 1st. Maybe that’s something seasonal to consider? 

Regardless, since last month began with a relatively large drop that was swiftly erased, it will take more than a one- or two-day hiccup to proclaim that the calendar’s change to September is the reason for a major change in sentiment.

Corporate news in Australia

-Lotus Resources ((LOT)) is looking to raise $70m in equity capital and has appointed Barrenjoey Capital.

-Buy now pay later company Klarna is moving forward on its US IPO, valued between US$13bn-US$14bn. CommBank ((CBA)) valued its stake at $956m at June 30.

-Co-founder locked-up shares in Tasmea ((TEA)) can be sold from September 29 when the escrow agreements finish.

-NRW Holdings ((NWH)) is buying electrical and tech contractor Fredon for -$122m with a -$60m earn-out and -$18m deferred cash in two years.

-Dyno Nobel ((DNL)) is nearing its decision to sell or shut down Phosphate Hill mine in Mt Isa.

-Marimaca Copper ((MC2)) looks to revive its ASX listings with a non-deal roadshow.

On the calendar today:

-EZ July PPI

-US July durable goods

-US July JOLTS

-XX Aug Global PMIs

-DOWNER EDI LIMITED ((DOW)) ex-div 14.10c (100%)

-EVOLUTION MINING LIMITED ((EVN)) ex-div 13.00c (100%)

-HITECH GROUP AUSTRALIA LIMITED ((HIT)) ex-div 5.00c (100%)

-MONADELPHOUS GROUP LIMITED ((MND)) ex-div 39c (100%)

-NEWMONT CORPORATION REGISTERED ((NEM)) ex-div 26.40c

-NETWEALTH GROUP LIMITED ((NWL)) ex-div 21.00c (100%)

-ORIGIN ENERGY LIMITED ((ORG)) ex-div 30.00c (100%)

-PRO MEDICUS LIMITED ((PME)) ex-div 30.00c (100%)

-SEEK LIMITED ((SEK)) ex-div 22.00c (100%)

-SONIC HEALTHCARE LIMITED ((SHL)) ex-div 63.00c (35%)

-WHITEHAVEN COAL LIMITED ((WHC)) ex-div 6.00c (100%)

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

The Australian share market over the past thirty days…

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