Risk Assets Learning to Live with Higher Yields and $100 Oil
Despite bond yields remaining at multi-decade highs and Brent crude still trading at the $100 handle, the S&P 500 notched a fresh record high on Tuesday, closing above 7,800 for the first time. The Dow Jones and Nasdaq also finished higher. What does this tell us? That risk assets are learning to live with elevated yields and oil prices, provided corporate earnings can still deliver the goods. The next US earnings season kicks off next week, and that is when we will get a clearer read on whether the corporate sector, particularly the technology names that have carried so much of the market’s momentum, can continue to shield equities from bond-yield and oil anxiety.
US Treasury yields have been on the rise again this week, with both the 10-year and 30-year yields reaching their highest levels since 2002. This move is not the result of a single catalyst. It is the culmination of several forces: persistently high oil prices that keep inflation expectations sticky, the Federal Reserve’s September rate hike and the market’s pricing of further tightening, and reduced appetite from traditional foreign buyers of US debt such as China and Japan. Pinpointing a ceiling for the benchmark 10-year Treasury yield, which is still the most important interest rate in the world, remains difficult given the multitude of upward pressures. That said, a meaningful pullback in oil prices would likely cool both inflation expectations and the Fed’s perceived hiking path, taking a good deal of the heat out of yields.
In foreign-exchange markets, the Dollar Index (DXY) continues to benefit from the higher-yield story. The DXY spent time above the 102 handle in the past week and was last seen trading around 101.80. The greenback is also being helped by the euro’s poor form, with the single currency trading near 17-month lows against the dollar, weighed down in large part by France’s fiscal concerns. Elsewhere, the USDJPY rate has been creeping higher, moving back above 158. Any further advance toward 160 and beyond would likely increase nervousness among both US and Japanese monetary officials, raising the possibility of another intervention of the kind seen in late July and early August to support the yen.
Gold has spent most of the period since late September trading sideways. High Treasury yields and a firm US dollar have capped the upside, while dip-buying and a degree of residual safe-haven demand have protected the downside. A fresh spike in oil or yields could prompt a break lower; conversely, a significant retreat in oil that brings yields down with it would open a clearer path higher. For now, the precious metal is finding conditions difficult in this higher-interest-rate environment, which is in stark contrast to the start of the year, when gold hit all-time highs near $5,600 in late January on the expectation of US rate cuts rather than hikes. Technical levels to watch include resistance around $4,240 and $4,305, with support at $4,120 and $4,060.
The economic calendar is relatively light this week, but the FOMC meeting minutes due on Wednesday stand out as a key event. Markets will be looking for further clues about what drove the Fed’s hawkish shift between the July meeting (when rates were held steady) and the September meeting (when the committee raised rates). We already know the August non-farm payrolls print was firm at +162,000 (later revised down to 133,000), while the September report came in meekly at just 29,000, though that weaker figure arrived after the September decision had already been taken. Next week’s US CPI release will provide a more-timely test of whether the Fed’s renewed hawkishness in September was justified. Currently, a Fed rate-hike this month is highly unlikely according to interest rates futures.
In short, equities are demonstrating a surprising ability to absorb higher yields and triple-digit oil, but the real test arrives with the coming earnings season. Strong results, particularly from the technology sector, would reinforce the view that corporate America can continue to look through the macro noise. Softer numbers, or another leg higher in oil and yields, would quickly put that resilience under pressure.
(Some visual images were created with the assistance of AI technology and are for illustrative purposes only.)
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