(Bloomberg) — The world’s biggest bond market rebounded, with traders gearing up for Wednesday’s $42 billion sale of 10-year Treasuries after a solid start to this week’s ramped-up issuance sizes.
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Following a selloff that drove two-year yields to the highest since before the Fed’s December “pivot,” bonds climbed. A $54 billion sale of three-year notes drew solid demand, bolstering sentiment and making traders shrug off a slew of cautious remarks from Federal Reserve speakers. The S&P 500 wavered. Megacaps were mixed, with Tesla Inc. up and Nvidia Corp. down. US-listed Chinese stocks rallied on bets the nation will be more forceful to prop up markets. New York Community Bancorp hit its lowest since 2000.
As expected a drumbeat of Fed officials joined Jerome Powell’s signals that the central bank will be in no rush to cut rates. Fed Bank of Minneapolis President Neel Kashkari noted the central bank has not yet reached its goal. His Cleveland counterpart Loretta Mester suggested she’s not in a rush to begin cutting rates, saying policymakers will probably gain confidence to ease “later this year” if the economy evolves as expected.
“The Fed expects to cut this year, but not right away,” said Chris Low at FHN Financial.
As bonds managed to rebound on Tuesday, stocks saw small moves.
“A period of consolidation across the major averages or a potential period of near-term selling pressure is probably overdue at this point,” said Anthony Saglimbene at Ameriprise. “Such a development could be healthy in the long term and help recalibrate expectations.”
Down days in the S&P 500 aren’t necessarily extinct, but they’ve become shallow relative to positive sessions.
Since early January, the gauge has seen an average gain of 0.66% in positive sessions, compared with a 0.45% drop in negative ones. That’s pushed the ratio of the two to about 1.5 — the highest skew in favor of the bulls this far into a year since 1995, according to data compiled by Bloomberg.
Meantime, Citigroup Inc. strategists say investor positioning in US technology stocks is so bullish that any selloff could trigger a wider rout.
Wagers on declines in tech-heavy Nasdaq 100 futures have been completely erased, leaving investors overwhelmingly expecting further gains. “The large consensus positioning is a risk that could amplify a turn in the market,” strategists led by Chris Montagu wrote in a note dated Feb. 5.
Bullish trends in S&P 500 futures stalled last week, although positioning remains net-long, Montagu said.
Reliable sources of liquidity are at the top of traders’ minds as they brace for another year of turbulence, according to a JPMorgan Chase & Co. electronic trading survey.
Volatile markets are predicted to be the greatest daily challenge for a second year in a row, the annual poll of institutional traders found. Access to liquidity is the biggest concern about market structure, ahead of regulatory change and data costs.
While volatility across asset classes remains relatively contained compared to recent gyrations, the worry is that it could spike if the global economy faces another shock. Markets are pricing in over a percentage point of interest-rate cuts from the Fed and European Central Bank, though the survey still sees inflation as having the biggest impact on markets in 2024. In second place is the US election — with a flurry of other votes due around the world as well, plus mounting geopolitical risk.
“While we continue to suspect market expectations for five rate cuts this year remains too optimistic, a factor in favor for bond bulls is that inflation-adjusted, or real rates, need to come down as price indexes improve,” said John Lynch at Comerica Wealth Management. “As a result, we suspect three cuts will prove sufficient to balance the risks to growth and inflation in 2024.”
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