Author: Erin Zhou

During China's National Day holiday, overseas stock markets mainly fell, gold, crude oil and other commodities fell, and the US dollar index soared and fell, but still maintained a strong position above 105.

The decline in risk assets is closely related to one factor - the continued surge in US Treasury yields. The 10-year U.S. Treasury yield rose 19BP to 4.78% during the National Day Mid-Autumn Festival "double festival", and the 30-year U.S. Treasury yield rose 24BP to 4.95%. The main reasons are the sharp cooling of US recession expectations, the revival of interest rate hike expectations and the rising US debt supply. A number of overseas institutions interviewed by reporters mentioned that in the past 50 years, the 10-year Treasury yield has been higher than the current 4.8% most of the time, in other words, the low interest rate of the past decade is only a special phenomenon, and it is necessary to prepare for the new normal of yields above 5%.

The surge in U.S. Treasury yields is not only bearish for risk assets, but also prone to capital outflows from emerging markets. During the festive period, the MSCI China Index fell 2.1% over the past week, mainly dragged down by the consumer services (-5.0%) and durable goods (-4.3%) sectors. The offshore yuan held around 7.3 against the US dollar.

U.S. long-term bond yields soared

Recently, US bond yields of various maturities soared rapidly to a new high in more than a decade, which is known by the market as the "Bondcano".

Bond yields and bond prices are usually inversely correlated, so the rise in US 10-year yields to a new 16-year high of around 4.8% actually means a heavy drop in prices. The index (TLT), which tracks U.S. Treasuries over 20 years, is down 15% this year, down from its 2020 high. In addition, the Bloomberg US Aggregate Bond Index has been negative for the first time in history for the second consecutive year.

There are several reasons for the eruption of the "U.S. debt volcano". Jerry Chen, a senior analyst at StoneX, told reporters that first of all, due to the recovery of energy prices and the recurrence of inflation, the Fed continues to firm its hawkish stance, vowing to maintain high interest rates and tightening policy for longer. The latest dot plot suggests that there is still the possibility of an additional rate hike this year, and that the number of rate cuts in 2024 may be reduced from four to two.

More importantly, the deteriorating debt burden and unbridled issuance of bonds in the United States have directly impacted bond market liquidity. In the four months since the debt ceiling was suspended in June, the U.S. national debt has increased by more than $6 trillion, totaling a record $4 trillion. In the next 1 months, about $33.12 trillion of low-interest debt is expected to mature, and the Treasury will inevitably continue to issue sky-high bonds, which will not only generate huge interest expenses and aggravate the fiscal deficit, but also continue to oversupply means a fall in bond prices, that is, an increase in yields. More worryingly, the vicious circle of "deficit-borrowing-high interest-deficit worsening" seems difficult to stop.

In addition, Jerry Chen mentioned that the current financial management capacity and government status in the United States have also made investors prohibitive of US debt. Although the shutdown crisis has been temporarily lifted, it is unclear whether the two parties will be able to negotiate a formal budget as soon as possible due to the removal of the speaker of the House of Representatives. Moody's has previously warned that the U.S. could lose its top credit rating. The reduction of overseas central banks, the reduction of the Fed's balance sheet, the shorting of hedge funds, and the shaking of investors' confidence in US fiscal have made the "US debt volcano" erupt more violently.

He believes that the high yield on US Treasury notes may last longer and there is a risk that it will continue to rise. For the past 50 years, the 10-year Treasury yield has been higher than the current 4.8% for most of the time.

At present, many investment leaders expect the 10-year U.S. Treasury yield to break through 5%, and the generally conservative major investment banks have recently raised their expectations. Goldman Sachs, for example, expects the 10-year Treasury yield to reach 4.3% in the fourth quarter, which is a lot higher than the previous forecast of less than 4%. The agency also expects the 10-year Treasury yield to reach 4.6% in the first quarter of next year, as the U.S. economy is likely to rebound in the first quarter of next year from the fourth quarter of this year. Moreover, the institution's forecast for the 2025-year US Treasury yield in 10 is almost above 4.2%. In contrast, in June this year, a number of institutions also predicted that the US bond yield would soon return to 6%~3.3%.

Risky assets have been hit

During the long holiday, overseas risk assets generally retreated, from U.S. stocks to gold and crude oil.

Currently, the gap between the yield on the S&P 500 and the yield on the US 10-year Treasury note is narrowing, indicating that buying stocks is less cost-effective. That's why risk assets are generally under pressure amid high bond yields.

In the case of the Nasdaq index, which has rebounded the most this year (which rose nearly 50% at one point), institutions are expected to tend to the downside, and the sharp rise in the index is more driven by large technology companies, and the concentration risk is not small. Traders believe that for those looking to sell rather than buy above 14500,14200, downside levels to watch include channel support around 13700,2022 and 14900,2, which acts as resistance in the counter-trend rally in 1. If a stop loss is set above <>,<> points, this trade will provide a risk-reward ratio of approximately <> to <>.

Goldman Sachs mentioned that the S&P 500 constituent companies will start releasing third-quarter earnings next week. The consensus is that sales will increase by 2%, gross margin will contract by 55BP to 11.2%, and earnings per share will be flat compared to last year. Excluding the energy sector, which is causing the drag, the agency expects earnings growth of 500% for S&P 5 companies. But given the "higher and longer" interest rate policy, continued wage growth, and AI investments by some tech companies, a massive gross margin expansion is unlikely.

In addition to U.S. stocks, gold is another class of assets that have been hit hard against the backdrop of soaring U.S. Treasury yields. A strong dollar has darkened gold's recent decline, which has fallen for eight consecutive days. The CFTC Investor Positions report shows that speculative net long positions in gold are rapidly decreasing.

During the long holiday, gold prices accelerated their downward trend after falling below $1900 per ounce, and traders focused on the key support level of the $1800~1810 area below, which is the overlapping area of the lower band of the channel and the February low. "While the severely oversold RSI indicator suggests a rally is imminent, it may be difficult for gold to truly reverse the current decline until the dollar reverses, so the magnitude of the rebound, if any, may be relatively limited." $2 is the initial target for the bulls, followed by the $1848 line. Jerry Chen said.

A-shares and RMB are expected to fluctuate in range

Next Monday (October 10), A-shares will resume trading, and the situation in the offshore market during the long holiday may provide reference. In terms of equities, the MSCI China Index has fallen 9.2% over the past week, with Hong Kong stocks remaining under pressure and liquidity remaining poor.

It is expected that A-shares may continue to fluctuate. "In the last week before the holiday, there was only four trading days, market sentiment did not improve significantly, northbound funds continued to have a net outflow, and the Shanghai Composite Index maintained a volatile trend, of which the TMT sector and the pharmaceutical and biological industries were significantly repaired, and the real estate and energy chains pulled back." Wang Qiangsong, head of the financial research department of Nanyin, told reporters that at present, there is a weak improvement in fundamentals, the profit growth rate of industrial enterprises turned positive in August, inventories showed signs of bottoming out, and the PMI production side and demand side were repaired in September, but in the context of slow repair of residents' balance sheets, real estate improvement was limited.

He also mentioned that external disturbances have intensified, U.S. bond yields have broken through new highs, U.S. fiscal pressure has been highlighted, and the market's expectations for Fed tightening have heated up, affecting overall risk appetite, so it is necessary to maintain the judgment of short-term index shocks, and it is necessary to observe overseas economic trends in the future and wait for the repair of domestic economic vitality.

The Ministry of Culture and Tourism reported that domestic tourism revenue during the Golden Week reached 7530 billion yuan, an increase of 2022% and 2019% over 130 and 2, respectively. During this period, the number of domestic tourist trips reached 8 million, an increase of 26% and 2022% compared to 2019 and 71, respectively. The box office of the movie exceeded 4.26 billion yuan, a year-on-year increase of more than 70%, but only about half the level of 2019.

In terms of exchange rates, in the face of pressure from a strong dollar, the People's Bank of China's continued stability maintenance signals are likely to keep the renminbi in the 7.3 range. The dollar index retreated higher and fell below 106 during the long holiday, but it had risen for 11 consecutive weeks, accumulating nearly 7%, and the last time it had such a strong gain was back in 2014, when it closed up in 27 of 22 weeks, accumulating nearly 20%.

"The renminbi exchange rate has been sawing around 7.3 recently. We calculate through the fundamental model, the current pivot is roughly below 7.20. This value has not changed much throughout 2023, but the emotional impact is more prominent. From overly optimistic at the beginning of the year to overly pessimistic since the second quarter, if this part of the disturbance is quantified in our model, it will rise roughly to the 7.40 mark, which is higher than the spot price. Zhu Yanhua, an international business expert of a large bank, told reporters.

In his view, the current dollar index is overvalued and will be affected by US fiscal easing in the short term, but as long as the Fed continues to strangle liquidity, the pattern of dollar shortage and dollar index rebound will be difficult to break. In the medium term, it remains to be seen whether the dollar index will return to the mean.