When Falling Yields Aren’t a Bull Signal

Key Points

  • Brent Crude futures climbed to $114.55 per barrel as conflict in the Persian Gulf intensifies.
  • 10-year Treasury yields fell sharply to below 5.0%.
  • Mega-cap stocks were sold, but the broad-based S&P 500 equal-weighted index rallied on the prospect of lower funding costs.
  • Gold, copper and other energy metals are experiencing a broad sell-off despite falling long-term rates.

Brent Crude futures (Dec ’26) have climbed to $114.55/barrel, headed for another test of resistance from the March and April highs at $118/barrel.

Brent Crude Futures (ICE December'26)

Average US diesel prices are above $6.00 per gallon.

EIA US Diesel Prices

Jim Bianco argues that we are already at the equivalent of $200/barrel crude. Diesel crack spreads are as high as $86.90 per barrel, up from $33/barrel in February, but refiners must cover shipping costs of $35 to $38/barrel versus $1 to $ 2 per barrel before the war.

He says that consumers currently “bitch and moan” when they fill up the truck, but they still drive. Demand destruction is when they park the truck and walk.

Bond Market

10-Year Treasury yields fell below 5.0%, finding short-term support at 4.95%. The sharp fall signals increased investor demand for bonds—a bearish sign for stocks.

10-Year Treasury Yield

Yields on investment-grade and high-yield bonds are rapidly diverging.

The spread between the lowest investment-grade (Baa) and 10-year Treasuries has narrowed to 1.44%, near the 30-year low of 1.38% in November 2024. By contrast, the spread between high-yield bonds (CCC and lower) and 10-year Treasuries has widened to 12.57% from 9.89% at the end of August.

High-yield (CCC and below) & Baa Spreads

From Grant’s Daily:

“The U.S. leveraged finance market is showing classic late-cycle characteristics,” analysts at Moody’s warned late last month. “As financing conditions have grown more selective, the gap between stronger and weaker borrowers has widened.”

A lasting downshift in market sentiment could prove costly to firms sitting on the lower rungs of the speculative-grade ladder. Firms rated Caa and below face $27 billion in debt maturities over the next year and $91 billion by fall 2028, the rating agency warned Tuesday.

Stocks

The Philadelphia Semiconductor Index (SOX) broke support at 11,000. Another bearish sign for stocks.

Philadelphia Semiconductor Index (SOX)

The S&P 500 is testing support at 7600. A lower Trend Index peak warns of secondary selling pressure. A breach of 7500 would warn of a correction to test 7000.

S&P 500

Mega-cap technology stocks are under selling pressure, with the Roundhill Magnificent 7 ETF1 (MAGS) testing support at 70.

Roundhill Magnificent 7 ETF (MAGS)

However, the broader-based S&P 500 equal-weighted index ($IQX) rallied on the prospect of lower interest rates.

S&P 500 Equal-Weighted IndexReuters:

A big week for US corporate earnings will be headlined by ​reports from three of the largest companies at the heart of the huge AI capital investment theme that has driven up equities.

Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN) — three of the so-called ​hyperscalers — will post results at a time investors are becoming wary of the risks of the spending on data centers.

The week will be critical in determining whether third-quarter results lived up to high expectations for US profit growth, with about one-third of S&P 500 companies reporting.

Dollar & Gold

The Dollar weakened as expectations of interest rate rises softened.

Dollar Index

Gold is testing primary support at $4,000 per ounce, driven by rising oil prices ahead of falling long-term rates.

Spot Gold

Energy Metals

Mining stocks for energy-related metals are under selling pressure.

Sprott Copper Miners ETF1 (COPP) is headed for a test of primary support between 35 and 32. Declining Trend Index peaks confirm selling pressure.

Sprott Copper Miners ETF (COPP)

Sprott Lithium Miners ETF1 (LITP) is in a steep downtrend. Declining Trend Index peaks, below zero, signal strong selling pressure.

Sprott Lithium Miners ETF (LITP)

Sprott Critical Materials ETF1 (SETM) has broken primary support at 30, with declining Trend Index peaks signaling strong selling pressure.

Sprott Critical Materials ETF (SETM)

Sprott Uranium Miners ETF1 (URNM) is also in a steep downtrend, with Trend Index peaks below zero indicating strong selling pressure.

Sprott Uranium Miners ETF (URNM)

Conclusion

The outlook for stocks is bearish. Falling 10-year Treasury yields are a bear signal.

Oil prices are rising, and stocks are falling as investors shift towards the security of bonds. Widening spreads for high-yield bonds warn of growing stress among low-grade corporate borrowers. Falling commodity prices warn that manufacturing demand will likely slow as a result of high energy prices.

Gold is testing primary support at $4,000 per ounce, pressured by rising oil prices and the conflict in the Persian Gulf. However, we remain long-term gold bulls and view the current weakness as an opportunity to accumulate.

Acknowledgments

Notes

  1. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.

Asian Stocks Plunge on Fed Rate Hike Fears

Key Points

  • Headline CPI increased to 3.7% for the 12 months to September, up from 3.4% in August.
  • Energy prices rose 20.4% year-on-year, signaling stronger inflation ahead.
  • Financial markets now expect at least a 25-basis-point rate hike in December.
  • Investors reacted to the threat of higher interest rates slowing the AI rollout, with the Philadelphia Semiconductor Index falling more than 4%, and South Korea’s KOSPI index shedding more than 8.0% in Thursday trading.
  • The IMF’s quarterly Financial Stability Report this week also highlighted the potential for market turmoil, citing a correction in AI-related asset prices, rising sovereign debt yields, and the impact of AI frontier models on cybersecurity as key risks.

The headline consumer price index increased to 3.7% for the 12 months to September, up from 3.4% in August. Core CPI (excluding food and energy) increased to 2.6% from 2.4% in August.

CPI & Core CPI - Annual

Energy prices climbed 20.4% (right-hand scale below) over the 12 months, warning of a sharp rise in CPI that tends to follow with a 1- to 2-month lag, as in 2021-2023 below.

CPI & CPI Energy - Annual

Gasoline prices remain high, at $4.33 per gallon on October 12.

EIA US Gasoline Prices

Diesel eased slightly to $6.18 per gallon on measures to ease the shortage ahead of the November midterms. However, reserve releases aren’t a long-term solution, and the Persian Gulf conflict will likely drag on into next year.

EIA US Diesel Prices

Financial Markets

Several Fed speakers have hinted that the Fed won’t raise rates at the October (27-28) FOMC meeting, but will hike again in December (8-9). The 2-year Treasury yield jumped to 4.95% after Thursday’s CPI report but has since settled at 4.70%. That is still 70 basis points above the Fed’s current target range of 3.75%-4.00%, implying at least 3 more 25-bps hikes.

2-Year Treasury Yield (CNBC)

High-yield bond spreads have jumped more than 2.0% since Kevin Warsh’s keynote address at Jackson Hole on August 28, to above 12%. Widening spreads warn of likely distress among small- and mid-cap borrowers when their current debt matures and they must roll it over at much higher rates.

High-Yield Bond Spreads

Stocks

The Russell 2000 Small Caps ETF (IWM)2 is testing secondary support at 270 on the weekly chart below, while declining Trend Index peaks signal selling pressure. A breach of 270 would indicate a correction to test primary support at 240.

Russell 2000 Small Cap ETF (IWM)

The S&P 500 remains in an uptrend, but retreated  1.1%, its largest daily loss since July, as the Philadelphia Semiconductor Index fell more than 4%.

S&P 500

A breach of primary support at 11,000 in the Philadelphia Semiconductor Index (SOX) would be a strong bear signal for stocks.

Philadelphia Semiconductor Index (SOX)

Asian Stocks

South Korea’s KOSPI index fell more than 8.0% in Thursday trading.

KOSPI Index

A sell-off in global technology hardware stocks deepened Thursday, with Asian chipmakers tracking Wall Street losses as concerns over further Federal Reserve interest rate hikes, financing of artificial intelligence investments weigh on sentiment.

South Korean chip giant SK Hynix plunged over 10%, while rival Samsung Electronics fell 7.1%.

In Japan, technology investment giant SoftBank Group tumbled 7.9%. Semiconductor testing equipment maker Advantest dropped 6.9%, while chipmaking equipment supplier Tokyo Electron lost 5.4%.

….The declines come as investors grow increasingly concerned that higher borrowing costs could weigh on the massive capital spending required to build out AI infrastructure, putting pressure on technology companies that have benefited from the AI investment boom.

Chief executives of Broadcom and Intel warned on Monday that financing could become a major headwind to the AI boom, with Broadcom’s Hock Tan saying it could be bigger challenge to AI expansion than shortages of chips or electricity. (CNBC)

Treasury Market

10-year Treasury futures caught a bid, with yields falling to 5.10% from 5.30% earlier in the month as funds increasingly flow from equities to bonds.

10-Year Treasury Yield

The IMF earlier warned in its quarterly Financial Stability Report of the potential for market turmoil, citing three salient risks that could be near-term catalysts for a sharp tightening of financial conditions:

First, although core firms in the AI ecosystem have been profitable so far—easing pressure on AI-related equity valuations—weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements.

Second, resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil given the foundational importance of sovereign bonds. High public debt and rollover risks remain unresolved, increasing the chances that a rise in yields could occur in a disorderly manner, despite stable bond market liquidity and the recent unwinding of some leveraged trades.

Third, cyber threats constitute a growing systemic risk as financial services become more digital and interconnected. For their part, frontier AI models are emerging as both powerful enablers of cyberattacks and critical defensive tools. These risks by themselves do not necessarily threaten financial stability, but they could become a systemic risk—impairments to key financial intermediation and credit provision, with serious negative economic effects—if they are amplified by financial vulnerabilities.

The report also highlighted hedge funds’ highly leveraged repo positions and pursuit of crowded trades that “could amplify market stress, with spillovers to prime brokers and broader financial markets”.

Dollar & Gold

The Dollar has strengthened on the prospect of higher interest rates, with the Dollar Index testing resistance at 103 before retracing to test new support at 102.

Dollar Index

Gold weakened on the prospect of higher interest rates and a stronger Dollar, and will likely test primary support at $4,000 per ounce.

Spot Gold

Conclusion

Financial markets are unsettled by the threat of higher inflation driving up interest rates, which could interfere with funding of the AI data center rollout. Stocks are selling off as investors move into bonds, which has lowered the yield curve by roughly 20 basis points in a few days.

South Korea’s KOSPI and Japan’s Nikkei indices are falling, and a Philadelphia Semiconductor Index (SOX) breach of primary support at 11,000 would be a strong bear signal for US stocks.

A Bitcoin1 retreat below support at 80,000 would confirm a market shift to risk-off.

Bitcoin (BTC)

The last two weeks of October are typically a precarious time for stocks, as fund managers reposition after the end of the financial year. We advise stock traders to keep stops tight and investors to adopt a defensive stance by shedding more volatile assets.

Rising interest rates and a strengthening Dollar are bearish for Gold, which is expected to test primary support at $4,000 per ounce. However, the underlying forces driving higher rates—inflation, poor fiscal management, and bond market instability— are all bullish for Gold. We remain long-term bullish on Gold and view the current sell-off as an opportunity for steady accumulation.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.