ASX drifts higher as banks and energy companies gain

“There are sound reasons why stocks have been resilient in the face of the sharp move higher in interest rates,” said David Lefkowitz, head of US equities at UBS Global Wealth Management. “And stocks will likely remain resilient as long as the improvement in corporate profit growth comes through as expected.”

The world’s biggest bond market has faced intense volatility amid expectations the Federal Reserve will keep rates elevated and the US government will boost bond sales to cover widening deficits.

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Billionaire investor Bill Ackman said he covered his bet against US Treasuries, saying “there is too much risk in the world to remain short bonds at current long-term rates.” Meantime, bond market veteran Bill Gross says he’s buying futures tied to the Secured Overnight Financing Rate and sees a recession in the fourth quarter.

The full impact of the most aggressive monetary-tightening campaign by global central banks in decades has yet to be felt and will remain a headwind for financial markets going into next year, according to JPMorgan’s Marko Kolanovic.

“I don’t think the yield on the 10-year Treasury bond is going to rise that much above 5 per cent,” said Dave Sekera, chief US market strategist at Morningstar. “There are a lot of technical factors that are hitting the bond market right now. We still have the Fed’s ongoing quantitative tightening program, and we also have higher-than-expected US deficit financing needs. Also, I’ve been hearing reports of foreign investors and central banks selling, as well.”

To Phillip Colmar, global strategist at MRB Partners, if there isn’t a consolidation phase in bond yields, equities are going to struggle.

“Within that equity market, you have to be careful about what you pick because what people loved earlier were tech stocks, which are longer duration,” Colmar added. “They better deliver because you have a high interest rate environment, and they’re priced for perfection.”

High bar

Investors looking to the earnings season for a dose of good news are hanging their hopes on big tech.

The five biggest companies in the S&P 500 — Apple, Microsoft, Google’s parent company Alphabet, Amazon and Nvidia — account for about a quarter of the benchmark’s market capitalisation. Their earnings are projected to jump 34 per cent from a year earlier on average, according to analyst estimates compiled by Bloomberg Intelligence.

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The odds of a year-end rally in US stocks are fading as investors face a multitude of risks from elevated profit estimates to the Fed’s policy tightening, according to Morgan Stanley’s Michael Wilson. The strategist said he “would not be surprised” to see further declines in the S&P 500 with “earnings expectations likely too high for the fourth quarter and 2024, and policy tightening likely to be felt from both a monetary and fiscal standpoint.”

With about a fifth of the S&P 500 members having reported their results, shares of companies that lagged analysts’ estimates have seen their stock underperform the benchmark index by a median of 3.7 per cent on the day of results, according to data compiled by BI. That’s the worst performance in the data’s history going back to the second quarter of 2019.

“October can be a tough month for stocks, but more often than not tends to see the S&P 500 rise,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets. “Unfortunately, as of mid-October of 2023, US equities are still in a spooky place.”

In corporate highlights, Chevron agreed to buy smaller rival Hess Corp. for $US53 billion ($84 billion), a deal aimed at boosting production growth as the US oil industry bets on an enduring future for fossil fuels. Roche Holding said it will pay $US7.1 billion to acquire Telavant Holdings, a developer of a promising therapy for treating inflammatory bowel disease.

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Meanwhile, the US Department of Justice has expanded its inquiry into Tesla’s business practices to include how far its vehicles can travel on a full charge and look at “personal benefits” to high-ranking executives or large shareholders, the company said without elaborating.

Elsewhere, Bitcoin jumped 6 per cent to $US31,672. Copper briefly tumbled to the lowest in almost 11 months, offering fresh evidence that soaring borrowing costs and slower spending are beginning to bite in all corners of the industrial economy.

West Texas Intermediate crude fell 2.2 per cent to $US86.11 a barrel, while gold futures fell 0.5 per cent to $US1984.60 an ounce.

Israel’s currency fell even after the central bank kept its policy interest rate unchanged as investors worried over the potential for the war to escalate and hit the economy harder.

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