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MARKETS

US stocks rebounded on Wednesday as the recent sell-off in Treasuries, which had driven yields to multiyear highs, temporarily abated.

The yield on the 10-year Treasury note declined by 0.07 to 4.73 percent during the day after reaching a recent peak of 4.88 percent. 

The proximate causes appear to be a wickedly timely 5 % slide in oil prices complimented by the below-expectations ISM non-manufacturing survey and ADP employment estimate underscoring a well-defined post-pandemic trend: good news is bad news (and vice versa), as markets navigate the remainder of the year and contemplate the Fed's path from here, 

The yield on the two-year note decreased, suggesting expectations for a November hike are moving into the pause camp. However, the upcoming Non-Farm Payroll report, scheduled for release on Friday, will be watched even more closely given the conflicting jobs data this week. It should provide a more definitive insight into the future direction of US yields and stocks. Given the current emphasis on interest rates, the report's findings will likely significantly influence the Federal Reserve's response and impact financial markets.

The modern-day history book says that when yields move lower, it is generally bullish for mega-cap tech Stocks. So, it is no surprise to see shares of major tech companies, known as the "Magnificent Seven," all posting gains.

But seriously, given all the market uncertainty, is it unsurprising to see this level of stock market resilience and its ability to bounce at the index level?

But markets are constantly exhibiting forward-looking behaviour, and for today, it could simply be a case where folks are starting to think that bond vigilantes are wearing out their welcome.

FOREX MARKETS

Given the interventionist lean from both the PBoC and BoJ, it could provide a temporary anchor for the Dollar in Asia, so attention is shifting back to the Euro. Recent data revisions have slightly improved Eurozone PMI estimates, suggesting potential stabilization in European activity, which could limit further upside for the US Dollar to some extent. However, the US has been setting higher standards for its competitors, with the possibility of more robust labour market data strengthening the Dollar's bullish case. Moreover, if US yields and the Dollar's upward momentum continue, there is a risk of intervention anchors aweigh, potentially leading to greater volatility in FX markets.

More recently, the weakness observed in Asian currencies can be primarily attributed to the rising US interest rates and oil prices. This trend is driven by a more hawkish Federal Reserve stance and supply cuts from OPEC, impacting the region's currencies as well. 

The excellent news is that oil prices suffered a significant leakage, and US bond yields may have finally topped out. Mercifully, some non-interventional stability could return to the region.

OIL MARKETS

Demand destruction always plays a crucial role in eventually easing price pressures.

Oil futures extended their losses during the midday on Wednesday in response to a U.S. Energy Information Administration report that revealed a larger-than-expected increase in domestic gasoline inventories during the last week of September, suggesting that demand had dropped to the second-lowest level of the year. 

Additionally, As the JMMC Meeting Started, sources leaked that no policy discussions were on the agenda. Oil markets didn't like that, as there were some expectations for Saudi Arabia to float the idea of pushing current cuts into 2024. At the same time, increasing chatter about more non-OPEC supply coming to market is not working in the bull market's favour this week.

BOND MARKET VIGILANTISM

The recent dramatic move higher in benchmark US Treasury yields, particularly in the 10-year Treasury, is indeed a significant macroeconomic event. These yields are a global benchmark for interest rates, impacting various financial markets, including equities, currencies, and commodities. The problem hiding in plain sight is there isn't a single apparent macroeconomic cause for the recent surge in longer-dated yields; perhaps it is a combination of factors, including expectations of improved economic growth, concerns about government deficits, and a rising term premium, have contributed to the increase in bond yields.

While it may not be the sole explanation, the nervousness among investors regarding the potential for a government crisis in Washington is a valid concern. The current political landscape in the United States, marked by partisan divisions and ideological differences, has raised apprehensions about lawmakers' ability to reach bipartisan agreements on critical fiscal and funding matters.

One of the specific concerns is the recurring issue of raising the debt limit, which has become contentious and politically charged in recent years. If lawmakers fail to reach an agreement to raise the debt ceiling, it could lead to a scenario where the US government defaults on its financial obligations, which would have severe repercussions for financial markets and the economy at large.

The perception that partisan intransigence and ideological divisions may persist and lead to further political standoffs could contribute to investor unease. These concerns highlight the importance of addressing political gridlock and finding constructive ways to manage fiscal and funding issues to maintain stability in financial markets and the broader economy.

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