The Overnight Report: Bond Market Tremors

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This story features BRAMBLES LIMITED, and other companies.
For more info SHARE ANALYSIS: BXB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Equity markets are increasingly dancing to the bond market's tune. Yields globally are rising, weighing on stocks.

US markets finished weaker, albeit off their lows on Monday.

After a steep sell off yesterday, ASX200 futures are pointing to a positive Tuesday.

Good Morning,

The ASX200 suffered a heavy sell off on Monday, down -126 points or -1.5% to 8,505.

An earnings downgrade from Brambles ((BXB)), an earnings miss from Elders ((ELD)) and a negative market update from Tuas ((TUA)) –shares down over -60%– didn’t exactly help market sentiment.

Rising bond yields, inflation and Budget concerns present an adverse tonic for Aussie investors.

After SaaS stocks rallied in the US overnight, all eyes will be on TechnologyOne’s ((TNE)) interim earnings report today. OFX Group ((OFX)) releases FY26 financials.

For more updates check out the corporate calendar https://fnarena.com/index.php/financial-news/calendar/

Our Editor, Rudi Filapek-Vandyck, will be on AusbizTV’s The Call at 12pm today.

Today’s Big Picture, J.L. Bernstein

Trump Calls Off Tuesday Strike on Iran 

Trump posted that he’s canceling a planned military attack on Iran scheduled for tomorrow.

Qatar, Saudi Arabia, and the UAE asked him to hold off, claiming serious negotiations are underway.

He told the military to stay ready for a “full, large scale assault” if talks fail.

Oil pulled back from session highs but Brent still settled above US$109.

Global Bond Selloff as Oil-Driven Inflation Takes Rate Cuts Off the Table

Brent crude has gone from roughly US$70 before the Iran war to above US$109 today, and that’s now flowing into inflation expectations worldwide.

Bond investors are selling because the Fed looks more likely to hike than cut.

The 10-year Treasury yield pushed past 4.6%, the 30-year hit 5.13%, and Japan’s 30-year reached an all-time high.

Morgan Stanley’s Michael Wilson flagged 4.5% on the 10-year as the threshold where yields start pressuring stock valuations.

NextEra Buys Dominion in $67 Billion Deal NextEra Energy 

$NEE is acquiring Dominion Energy $D in an all-stock deal worth roughly US$67 billion.

The combined company will be the world’s largest regulated electric utility.

AI-driven electricity demand is the catalyst here.

NAB Markets Today Research extract

It was a calmer start to the week for financial markets following the bond led moves of late last week. 

Drivers of market sentiment, or dominant themes for the day, were an easing in fiscal concerns in the UK, and the ongoing watching of news headlines on the Middle East conflict. All of which supported a mild risk on sentiment, even as oil prices remained near the upper end of recent trading ranges.

It was a quiet start to the week in terms of economic data releases. China’s retail sales and industrial production reports were below expectations, both posting the weakest readings in nearly three years.

Factors seen to drive the soft readings were elevated energy prices which were seen to weigh on consumer spending and factory activity while weather patterns (severe rainfall) impacted building activity.

The only other data releases for Monday were the US New York Fed services business activity report and the NAHB housing market index. The former remained in negative territory but there was a meaningful improvement from the previous month (index at -5.5 from -14.0) with the index back at levels recorded late last year.

The NAHB homebuilder index lifted to 37 in May (from 34), coming in above consensus. The lift was seen across the three subcomponents; current sales conditions rising to 40; sales expectations lifting to 45 and prospective buyers traffic index at 25.

While the index did lift in the month, it remains within the lower end of the narrow range recorded over the past year. Given the rise in mortgage rates (the 30-year rate has increased from 6.09% in February to 6.45% currently), the weakness in consumer sentiment and slowing in population growth, homebuilder sentiment is expected to remain subdued.

The economic data releases had limited impact on financial market sentiment with the focus remaining on the fiscal backdrop and developments in the Middle East.

For the bond market, European rates closed lower, led by Gilts while US treasuries were higher in yield for most of the session, they are currently lower on reports from the Whitehouse that ‘serious negotiations are now taking place’. 

The driver of the rally in Gilts (30-year closed down 8bps, 10-year down 7bps) was an easing in fiscal concerns following comments from Andy Burnham (a Labour rival to the current Prime Minister Keir Starmer), noting that he would not support any changes to the government’s self-imposed limits on borrowing were he to become the next UK PM.

While Gilts closed lower in yield to start the week, levels remain elevated relative to week ago levels (10-year Gilt yield is currently at 5.098% versus 4.998% to start last week). 

US treasuries remained heavy to start the week, lagging the overnight rally in European markets. There was talk that dealers were still re-distributing the previous week’s refunding (where auction results were soft) while re-positioning could also be at play (some unwinding of net longs as investors re-position for the changing outlook for the Fed – US OIS curve prices cumulative 16bps of rate hikes by year end and 31bps tightening by mid 2027).

As mentioned above, there has been a late rally in treasuries following comments out of the Whitehouse that Trump has called off a planned military strike on Iran given that there are ‘serious negotiations’ underway.

In the commodity space, oil remains the dominant story but agriculture and industrial metals are also seeing support, driven by the continued closure of the Strait of Hormuz.

WTI reached a high of US$108.70 near the open of Monday’s session, largely trading a tight range before briefly dipping lower (to US$102.65) following an unconfirmed report from Iran’s Tasnim news agency citing an unnamed source claiming the US had agreed to suspend sanctions on Iranian crude.

The US denied this report and the oil price quickly rebounded, to currently be at US$106.22.

Speaking at the G7 finance ministers meeting in Paris, the head of the International Energy Agency warned there were only ‘several weeks’ left of stored oil supplies if the current rate of depletion continues.

To help ease the depleting global oil supplies, the US Treasury has announced temporary waivers to sanctions on Russian oil for “energy-vulnerable countries”. Treasury Secretary Scott Bessent said the action would help to “stabilize” the oil market.

It has been a mixed session for equities with European markets diverging from the US. The former supported by hopes of an easing in Middle East tensions and some easing in concerns around the UK fiscal backdrop (as discussed in the bond section above).

US stocks flipped from small gains and losses reflecting a lack of direction amidst conflicting news on the Middle East and a lack of key economic data.

In a quiet start to the week, Bloomberg is reporting the US trading session reflects more ‘rotation than a breakdown’ with investors rotating out of some crowded trades (ie AI) and into defensives or stocks that have lagged the recent rally.

Given elevated oil price and the absence of any signs that the Strait of Hormuz is opening anytime soon, energy stocks out-performed to start the week.

In currencies, the pound is the strongest performer, amidst the easing in UK fiscal concerns. The yen is the weakest of the majors with concerns about the direction of Japanese monetary and fiscal policies.

AUDUSD is little changed, currently at 0.7171.

Time for a Break or a Brake? Ed Yardeni & Toby Hearst extract

The S&P500 sold off by -1.2% on Friday after hitting a record high of 7501.24 on Thursday. We are sticking with our 8250 year-end target for the S&P500.

However, the index might have peaked for a while. That’s because bond yields spiked on Friday, which just happened to be Kevin Warsh’s first day at the office as the new Fed chair.

The bond market fears he will tolerate inflation rather than hike the federal funds rate (FFR). He will likely have to cave and join the tightening camp sooner rather than later.

The Bond Vigilantes will force him to pivot. So will his colleagues on the FOMC.

The Strait of Hormuz remains closed. In a post on Truth Social, President Donald Trump warned: “For Iran, the Clock is Ticking, and they better get moving, FAST, or there won’t be anything left of them. TIME IS OF THE ESSENCE!”

A drone strike caused a fire at a nuclear power plant in the United Arab Emirates, officials there said on Sunday, while Saudi Arabia reported intercepting three drones.

Brent crude is up US$2 to US$111 per barrel on Sunday evening. The longer it remains here or higher, the greater is the likelihood that the Fed will have to pivot from its easing bias in April to a tightening bias in June and an actual rate hike in July.

We wouldn’t rule out a June rate hike.

The S&P500 forward P/E has risen 10% from its recent low of 19.1 to 21.1 on Friday, while the 10-year yield has climbed 63 bps from its low of 3.96% earlier this year. If yields continue climbing, stocks will likely experience another P/E-led pullback.

We would view it as another buying opportunity.

The S&P500 market-weighted index is more vulnerable to a pullback than is the equal-weighted index. That’s because it is more stretched relative to its 200-day moving average.

With the Q1-2026 earnings reporting season largely over, the near-term catalyst calendar is light for the stock market, aside from Nvidia’s report on Wednesday.

Yields are elevated, oil prices are elevated, and the market is stretched. Sideways may be the path for the next few weeks.

A small pullback would not surprise us. That is not a reason to abandon our year-end target of 8,250. Earnings breadth is improving.

If the Mag-7 stalls from here, the Impressive-493 can support the index. The bull case is intact, in our opinion.

A correction is inevitable, Ipek Ozkardeskaya, Swissquote

The big story –-and dominant market driver-– is becoming the rapid selloff across sovereign bond markets, as bond yields in major economies, including the US and Japan, soared last week after a set of inflation numbers showed price pressures accelerated faster than analysts expected due to Middle East-led energy price pressures.

Yes, it was predictable. The funny thing is there is always a pivotal moment that delivers the “uh huh” moment to investors. Last week, that moment came with inflation numbers from major economies, while oil prices kept rising due to the lack of progress in Iran peace talks.

And this Monday, bond stress remains in the headlines, as US crude traded above US$108pb earlier in the session, with upside risks remaining dominant as the prolonged Middle East conflict leads to a record decline in global oil reserves.

The Japanese 10-year yield hit 2.80% before bouncing lower, while the Nikkei sold off another -1% following Friday’s sharp -2% retreat, also dragging major US and European indices lower. Tech stocks took a hit simply because they have been carrying the latest rally on their shoulders.

In China, the latest economic data looked particularly bleak, with an unexpected fall in investment, an unexpected slowdown in industrial production, and a worrying decline in retail sales growth to near-zero in April, mostly due to a -15% plunge in car sales.

The weakness was largely explained by heavy disruptions linked to the Iran war.

This morning, futures are in the red and the bearish mood is justified: rising inflation fuels hawkish central bank expectations, reinforces the outlook for higher rates, and weighs on valuations. This makes sense.

What didn’t make sense was major indices rallying to ATH levels while investors KNEW inflation was going to become a problem as Middle East tensions dragged on. But strong AI earnings and solid guidance outweighed the risks, while CEOs of non-tech companies increasingly warned the energy crisis was starting to eat into consumers’ purchasing power.

Now, this setup has been in place for more than two months, and central bankers have already expressed their views on what’s coming.

The European Central Bank (ECB) is expected to hike rates as soon as next month, while some hawkish voices are also growing louder at the Bank od Japan (BoJ).

The Bank of England (BoE) is on slippery ground, with gilt yields also pressured by the political earthquake there. I wouldn’t touch sterling nor UK gilts at this moment. There is too much political uncertainty, making the fiscal policy path highly uncertain in a country where growth and productivity are both notably under pressure.

In the US, there has been a major shift: the probability of a December rate hike is now priced in at more than 50%. Activity in Federal Reserve (Fed) funds futures is now pricing in a 25bp-plus rate hike for this December at above 50%.

That’s a major shift for a Fed that was, until recently, expected to keep rates steady.

Remember, before the Iran war started, markets expected the Fed to CUT interest rates this year. The White House even chose Kevin Warsh partly because he was seen as someone who could help deliver lower rates if he were to become the next Fed chair.

Today, markets are pricing a more than 50% chance of a December rate HIKE instead.

That’s not great news when equity prices are flirting with ATH levels and valuations already look stretched.

A correction is inevitable!

The Nasdaq100 PE ratio is above 38 today, meaning a correction would actually be healthy to bring valuations back to a more reasonable — and down-to-earth — level.

If the Nasdaq100 PE ratio were to move back toward its historical range — somewhere around 25x to 30x earnings — it would likely imply a meaningful pullback in equity prices unless earnings growth accelerates fast enough to justify current valuations.

How meaningful?

Pure maths suggests that a move from 38x PE to 30x PE would imply roughly a -20% to –22% correction if earnings expectations remain unchanged.

Assuming earnings continue to grow, however, a correction of -10% to –15% may be more reasonable. That would bring the Nasdaq100 toward the 23.6% Fibonacci retracement level of the rally from April 2025 to today, near 26,600, and potentially toward 25,200, near the current 200-DMA.

In theory, such a retreat should not reverse the positive trend, which would remain intact above the 24,800 level, but it would take some air out of the rally and allow for a healthier path higher.

This week…

The focus will remain on Iran and the Strait of Hormuz, but also on UK inflation, FOMC meeting minutes, and flash PMI numbers across major economies.

On the earnings front, Nvidia is due to release earnings on Wednesday after the closing bell. Nvidia’s results have been one of the most important gauges of the health of the AI growth story. But that is no longer entirely the case.

Nvidia chips are still considered the best in the market for training complex AI models, but running them also requires CPUs and memory chips. This is why memory chipmakers have increasingly taken over the rally, while traditional CPU makers and memory specialists like Intel and Micron have recently outperformed Nvidia, and Korean memory chipmakers continue to dominate headlines.

So I believe Nvidia earnings could temporarily divert investors’ attention away from geopolitical worries and soaring bond yields. But the bar is now set extremely high for Nvidia, and an earnings beat alone may not automatically trigger a positive market reaction.

Corporate news in Australia:

• BP considering a partial sale of its Browse LNG stake amid wider LNG asset sales linked to Shell’s North West Shelf project
• Investors in oOh!media ((OML)) are backing rejection of current takeover offers while encouraging improved bids from private equity groups
• KKR is preparing for a possible bid in Rio Tinto’s ((RIO)) upcoming infrastructure asset sale
• Plus ES attracting major infrastructure bidders, though valuation expectations and owner approval remain uncertain
• Sale of Secure Electronic Registries Victoria may be delayed amid uncertainty around property market activity and valuation following tax changes
• Pro Medicus ((PME)) secured a $90m US healthcare contract with Beth Israel Lahey Health
• Santos ((STO)) commenced oil production at its Pikka project in Alaska
• Electro Optic Systems ((EOS)) raising $175m to fund its expanded takeover of Marss Group
• Elders ((ELD)) posted higher profits, though shares fell on concerns around rising fuel costs
• Oz Hair & Beauty expanding nationally with plans to reach 50 stores by 2027
• Tuas ((TUA)) shares slumped after Singapore authorities accused its subsidiary of using unauthorised radio frequencies
• Life360 ((360)) launched a $314m share buyback aimed at reducing stock dilution from employee incentives
• Brambles ((BXB)) downgraded FY26 guidance after higher US repair costs weighed on earnings expectations
• The Reserve Bank of Australia is promoting stablecoins and tokenised assets as part of its longer term digital finance strategy
• WIA Gold ((WIA)) is raising up to $92m in equity to support growth projects
• Ingenia Communities ((INA)) to pay fines and compensation following tenancy law breaches involving missing cooktops
• Woodside Energy’s ((WDS)) Browse gas supply strategy facing pressure after Inpex increased involvement in the project
• Lendlease ((LLC)) is exploring strategic restructuring options amid market speculation around advisory proposals from Barrenjoey
• Innovaero is progressing toward an ASX IPO after adding investment banks to its advisory team
• Anglo American is selling its Queensland coal mines for up to $5.4bn as part of a broader portfolio exit from coal assets

On the calendar today:

-NZ 1Q PPI

-AU April NAB Business Survey

-AU RBA May Minutes

-AU Westpac Consumer Confidence

-JP 1Q GDP

-EZ May ZEW

-UK March Earnings

-UK March Unemployment

-US April NFIB

-ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ((EOS)) AGM

-GQG PARTNERS INC ((GQG)) ex-div 3.41c

-JANUS ELECTRIC HOLDINGS LIMITED ((JNS)) earnings report

-METALS X LIMITED ((MLX)) AGM

-OFX GROUP LIMITED ((OFX)) earnings report

-PALADIN ENERGY LIMITED ((PDN)) Qtrly Update

-TECHNOLOGY ONE LIMITED ((TNE)) 1H26 earnings report

-WESTGOLD RESOURCES LIMITED ((WGX)) Qtrly Update

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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