November 4, 2024 | VIX, Bond Yields, and Election Implications

MARKETS

S&P 500: Down -13 points to 5716, VIX: 22.49

Asia: Japan closed, China +1.17%, Hong Kong +0.30%

Europe: Euro Stoxx 50 -0.42%, FTSE +0.19%, DAX -0.47% FX: USD (DXY) down 0.46%, EUR up 0.48%, GBP up 0.17%, JPY up 0.64%, CNY up 0.19%

Energy: WTI Crude up 2.63% to $71.29, Brent up 2.38% to $74.83

Cross markets: Terminal rate unch at 4.64, Implied rate cuts 2-years from terminal down ~4bp at 99bp, 2/10 yield spread +14bp

Treasuries: 2-year yields down ~5bp at 4.158%, 10-year yields down ~9bp at 4.295%, 30-year yields down ~9bp at 4.489%

WHAT WE'RE THINKING

Snapshot: US equities?are mixed after the S&P 500 (SPX) posted a second straight weekly decline on Friday.??Utilities lag with the FERC/AMZN nuclear decision putting pressure on CEG and independent power producers like TLN and VST.??Oil and gas names outperform on higher crude prices, while REITS draw support from a pullback in bond yields. MOS is the best performing stock in the SPX on reports that Belarus is planning to cut potash output, followed by FSLR that becomes an inexpensive hedge into US election results.??Semis lead within Tech on NVDA’s inclusion in the Dow Jones Industrial Index (INDU), while Comm Services lag despite earnings-related strength in FOXA and CHTR as investors pare positions in META/GOOGL. Treasury yields are lower with curve flattening into major events this week and a $58B 3-year auction later today. The Dollar Index is lower on position squaring into the election. Gold is little changed, while copper lifts on China stimulus hopes and WTI rallies on a reinstated Middle East risk premium and delayed (one month) OPEC+ production hike.??

• September Factory orders fell for the fourth time in five months but is mostly ignored into tomorrow’s US election/ISM services report and Thursday’s Fed meeting/Powell press conference, Q3 nonfarm productivity, unit labor costs and weekly jobless claims.??Another 103 S&P 500 companies are also scheduled to report earnings this week.??
• Lower bond yields and dollar weakness follows a shift in betting odds back toward Harris after a recent Iowa poll put the candidate up by 3 points. Election-related position squaring also drives disparate performance in Trump/Harris equity baskets.??
• China kicked off its NPC today with investors expecting fiscal stimulus announcements later in the week despite today’s WSJ downplaying stimulus optimism. Media reports last week estimated stimulus in the CNY10T/$1.4T range.??
• BRK/B makes the list of earnings-driven underperformers after Q3 operating income fell short due to weak insurance underwriting.??ENTG, L, MAR, NYT, PEG, TPG and ZTS also trade lower after morning reports, while shares of BEN, CC, CHH, FIS, FRPT, RVTY and YUMC trade higher after results. Afternoon earnings highlights include AIG, AVB, CLF, HUM, LSCC, NXPI, PLTR and WYNN.

Bond yields: Ten-year bond yields have risen +65bp since mid-November on a combination of firmer macro data and election expectations for a Republican sweep.??A fair value bond valuation model attributes ~45bp to macro data, which leaves ~20bp to election expectations. Higher yields in a Republican sweep scenario are based on the increased likelihood for the extension of current tax rates (set to expire at end of ’25) and the potential for lower corporate tax rates that the CBO scores on a revenue neutral basis. Bond yields are lower today as participants mull Friday’s weak Jobs Report and hedge election related uncertainty.??In our opinion, the October Jobs Report was objectively weak and the risk of higher yields in a Republican sweep scenario have been overstated.??Last week, we discussed how deeply oversold the bond market had become based on the Treasury put/call ratio z-score reaching extremes from last October when 10-year yields were testing 5%. We also noted reversal indicators in 5, 10 and 30-year tenors on Thursday 10/24 and again on Tuesday 10/29.??Thirty-year yields are off Friday’s high of 4.58% to 4.51% this morning with some initial short covering taking long yields to 4.43%.??We’d expect a more significant pullback in yields on a break below 4.38%.??While this seems subtle or insignificant, a move below 4.38% would likely trigger notable outperformance in beta/rate sensitive equity groups like homebuilders, regional banks and tower stocks.

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Election: The macro backdrop will be the primary driver of markets with the potential for election results to serve as a near-term clearing event for equities.??In our opinion, election uncertainty has resulted in more risk-off/neutral positioning rather than positioning for alpha generation. Consider than fund flows since 2019 (September data) have gone to Cash up +$3.47T, Bonds up +$2.03T and Equities +$55B. We also see the potential for election results to be a clearing event for incremental US economic activity given that a non-trivial percentage of September/October ISM manufacturing respondents cited election uncertainty as a reason to defer capex decisions.?

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Risk: Rising/elevated volatility is the primary near-term risk for equity markets.??The CBOE Volatility Index (VIX) reached uncomfortably elevated levels just above 23 last Thursday. The VIX has pulled back to a still elevated level of ~22 today.??Higher volatility results in multiple compression and the current ~21 forward multiple on the SPX increases the risk of a VIX spike.?

FACT OF THE DAY

The ‘Sky Beam’ that shoots out of the Luxor Hotel in?Las Vegas?attracts so many insects that it has established a new ecosystem of moths, bats, and owls.?Who needs to pay $1200 to see The Eagles sing ‘Hotel California’ at the Sphere when you can watch an owl eat a bat from the tailgate of your Dodge Caravan…for free.??

JSC IN THE MEDIA

The Close on Bloomberg:??Andrew discusses AMDs downbeat earnings report and its challenges gaining meaningful market share in AI training. He also highlights a potential opportunity for AMD and others when the majority of AI workloads transition from the training to inferencing. Watch Now

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American Express Earnings: Andrew discusses AXP as a relative safe haven and fully-valued stock, while shifting attention to the opportunity in regional banks. Watch Now

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Markets react as tensions rise in the Middle East: Andrew comments on recent events in the context of a market that is richly valued and therefore more sensitive to shocks of all kinds. Read on Reuters

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See more of JSC in the Media.

THIS DAY IN HISTORY

November 4, 1979: The record for lowest yards by a team in an NFL game is set when the Seattle Seahawks make only 7 yards against the Los Angeles Rams.

CATALYST CALENDAR

Tomorrow: 1) US election; 2) US services ISM for October; 3) the US trade balance for September; 4) Singapore retail sales for September and; 5) earnings before the open: ADM, AGCO, APO, BLD, BLDR, BR, BRKR, CMI, DD, EMR, EXPD, GFS, GOGO, HSIC, IT, LGIH, LPX, MPC, PINC, RACE, TKR, TRGP, WLK, YUM. After the close: AIZ, BGS, CPNG, CRC, DVN, EXAS, GO, IFF, JKHY, LUMN, MCHP, MRCY, NE, NOG, SMCI. EU earnings: Associated British Foods, DHL, Hugo Boss.

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Wednesday: 1) Eurozone services PMI for October; 2) the Eurozone PPI for September; 3) Taiwan CPI for October; 4) Japan wage numbers for September; 5) China imports/exports for October and; 6) earnings before the open: AVA, AEP, BCO, COR, CRL, CVS, FUN, HWM, IRM, JCI, JLL, KMT, LINE, LXP, MAC, MKTX, OC, ODP, PFGC, PNW, PRGO, SMG, SRE, STWD, SWX, TNDM, TRMB, VSH. Earnings after the close: ACLS, AEE, ALB, AMC, ANSS, APA, APP, ARM, ASH, ATO, BMBL, BROS, BYND, COHR, COTY, CSGS, CTVA, CXT, CXW, DUOL, DV, ELF, ET, EVTC, FICO, GILD, HST, HUBS, IPAR, JAZZ, JXN, KAR, KD, KVYO, LYFT, MCK, MKSI, MTCH, NTR, PAHC, POWI, PR, PRI, PTC, QCOM, QTWO, RDN, RNR, SEDG, SKT, SRPT, STE, TKO, TNDM, TRIP, TTWO, UPWK, VAC, VECO, VZIO, WMB, WOLF, ZG. EU earnings: BMW, Novo Nordisk, Pandora, Puma, Unicredit.

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Thursday: 1) US nonfarm productivity/unit labor costs for Q3; 2) US weekly jobless claims; 3) US wholesale inventories/trade sales for September; 4) FOMC decision; 5) US consumer credit for September; 5) BOE decision; 6) Eurozone retail sales for September; 7) German industrial production for September; 8) German import/exports for September and; 9) earnings before the open: ACIW, AEE, APD, BDX, CCOI, CEVA, CG, COMM, CRH, DDOG, DT, DUK, EDR, ELAN, EPAM, EPC, EVRG, FWONA, GEO, GERN, HAE, HAIN, HAL, HBI, HGV, HSY, IPAR, KLG, KVUE, MPW, MRNA, MTSI, MUR, NXST, OSCR, PBH, PCG, PENN, PLNT, PZZA, RL, ROK, RXO, SCSC, SEE, SHOO, TAP, TGNA, TPR, TPX, UAA, USFD, VITL, VST, VTRS, WBD, WD, WRBY, WWW, XRAY, YETI, YOU. Earnings after the close: ABNB, AFRM, AKAM, AL, ALRM, ANET, ARRY, AXON, BE, BILL, BL, CABO, CPAY, CPRI, DBX, DKNG, DOCS, DXC, EOG, EVH, EXPE, FIVN, FTNT, G, GDOT, HRB, LCID, LITE, MGNI, MSI, MTD, NET, NWS, PEB, PINS, PODD, PTCT, RIVN, RUN, SG, SMR, SOLV, SQ, TEM, TOST, TTD, U, UPST, VVI, YELP, ZD.

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Friday: 1) Michigan sentiment report for November; 2) China CPI/PPI for October; 3) Taiwan import/exports for October and; 4) earnings before the open: ADNT, BAX, BLMN, CNH, FLGT, FLO, FLR, LAMR, NRG, PARA, WMS. EU Earnings: IAG, Richemont.

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