Markets Overview

  • ASX SPI 200 futures little changed at 6,989.00
  • Dow Average up 0.1% to 34,142.14
  • Aussie down 0.9% to 0.6431 per US$
  • U.S. 10-year yield fell 7.2bps to 4.5706%
  • Australia 3-year bond yield fell 2.5 bps to 4.24%
  • Australia 10-year bond yield fell 2.7 bps to 4.70%
  • Gold spot down 0.5% to $1,967.32
  • Brent futures down 4.2% to $81.64/bbl

Economic Events

  • 11:00: (AU) Australia to Sell A$800 Million 2.75% 2035 Bonds

A rally in big tech drove stocks to their longest winning streak in two years, with investors shrugging off the latest attempts from Federal Reserve speakers to tone down Wall Street’s dovish bid.

After a series of twists and turns in the first hour of trading, the S&P 500 rose for a seventh straight day and got closer to the key 4,400 mark. The Nasdaq 100 climbed about 1%, with Microsoft Corp. hitting an all-time high and cloud-software shares soaring. The dollar extended its rebound. Bonds climbed after Bank of England Chief Economist Huw Pill hinted rate cuts may be on the table in 2024. Oil sank over 4% to settle near $77 a barrel.

Fed Governor Michelle Bowman said she continues to think the central bank will need to raise interest rates higher to contain inflation — but added a surge in Treasury yields since September has led to tighter financial conditions. A jump in US yields over recent weeks amounts to nothing less than an “earthquake” for the bond market, according Governor Christopher Waller.

“We’ll be especially attentive to policymakers’ thoughts around the recent shifts in financial conditions and what a nearly 50 basis-point drop in 10-year yields and a strong rebound in equity valuations could mean for the path of monetary policy,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

Investors flocked to zero-coupon bonds during October’s Treasury rout in a bet that yields would decline from multiyear highs.

About $10.3 billion of zero-coupon Treasuries were created in October, the second-highest monthly total on record, data released by the Treasury Department late Monday show. The $12.2 billion generated in October 2018 — also following a surge in yields — was the most on record.

Other News

The world’s central banks keep draining the flood of pandemic-era liquidity from financial markets.

The efforts are getting a fresh push from the Reserve Bank of Australia, with banks there set to repay A$104 billion ($67 billion) in loans to the central bank in 2024, with more than 85% to be repaid in the second quarter. The pace of the unwind will be the fastest in Australian history, which may put upward pressure on money-market rates there, Bank of America Corp. said in a note Tuesday.

The move will contribute to the broader push by policymakers to pull back the massive stimulus they started injecting into their banking systems in 2020. Even though the Federal Reserve has paused its rate hikes, it’s still pulling back support from the US bond market. The Bank of England and the European Central Bank have been withdrawing liquidity, too, contributing to the tightening in financial conditions globally.

In recent weeks, the extra interest that Australia’s four major banks pay to borrow has widened to 7 basis points over the benchmark from around zero.

“Central banks’ balance-sheet reduction will further deplete excess liquidity in the US, UK and Euro Area but the timing, speed and effects will vary,” strategists including Oliver Levingston wrote in a note to clients Tuesday. “For some markets, excess liquidity could return to pre-pandemic levels in the next 18-24 months.”

In the US, the Fed has been reducing its holdings of Treasuries and mortgage-backed securities since June 2022 by not buying new securities to replace those that mature.

BofA strategists Mark Cabana and Katie Craig have said the central bank may stop that so-called quantitative tightening once nearly all of the cash parked in the overnight reverse repurchase agreement facility reaches zero, sometime in the second half of 2024 or the first half of 2025.

The ECB and the BOE have also been pulling back funds issued through longer-term lending programs similar to Australia’s. Europe’s operations started maturing in September 2022 and the approximately €500 billion ($535 billion) outstanding is expected to mature by the end of 2024, at which point euro money-market rates are expected to widen, according to Bank of America. Nearly three-quarters of the UK’s borrowings will mature by the end of 2025.