Markets Daily: Bond traders get it wrong again

Yields are climbing around the world

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Markets Snapshot S&P 500 Futures 5,870.5 -0.44% Nasdaq 100 Futures 20,405.75 -0.55% US 10-Year Treasury Yield 4.202% +0.006 WTI Crude Oil Futures 71.29 +1.03% Gold 2,735.48 +0.57% Market data as of 06:30 am EST. View or Create your Watchlist Market data may be delayed depending on provider agreements.

Five things you need to know

US stock futures dip, putting the S&P 500 on course for its first back-to-back retreat in six weeks. Trader exposure to the index has reached levels that were followed by a 10% slump in the past, Citigroup strategists say.  Treasury bonds steadied, though yields around the world are climbing after yesterday's selloff in the US. Mary Daly of the Federal Reserve Bank of San Francisco says she expects the central bank to keep cutting interest rates.  Hedge funds cut back on bearish dollar bets ahead of the election, making the biggest net positive swing in trades in three years. HSBC kicks off a sweeping business restructuring to cut costs. German software firm SAP reports soaring cloud revenue as customers switch to AI tools and analytics. The shares rose to a new all-time high.

Trouble in bond markets

Bonds markets are reeling from the risk that the Fed won't cut interest rates as much as expected.  The 10-year Treasury yield rose above 4.2% for the first time since July, setting off a surge in borrowing costs from Australia to Germany. A gauge of expected debt-market volatility, called the Ice BofA MOVE index, is now around its highest of the year. Once again, it looks like bond investors got carried away with a rally fueled by optimistic bets for easier monetary policy — only to be hit with the reality that change may not happen as quickly as they would like. It's a pattern that played out on repeat for the past two years. Here's some of the reasons behind the bond market selloff this time around:  Traders are rethinking the path of US interest rates. A repeat of September's half-point cut is already off the table. Torsten Slok of Apollo Management sees a rising chance that the Fed will hold rates in November and others think policymakers will skip in December. On Monday, Fed officials indicated to varying degrees that they plan to take rates lower, but perhaps more slowly  than anticipated. The US jobs market is strong. The economy is proving more robust than expected. The Bloomberg Economic Surprise Index, which captures when data exceeds economist forecasts, is at the highest since May.  Threat of faster inflation under Trump. The presidential race is still a coin-toss with two weeks to go, but Republican Donald Trump has the advantage over Democrat Kamala Harris in betting markets. His support for higher tariffs and looser fiscal policy has been seen as unfriendly to bonds because it means faster inflation and more debt. Budget deficits are getting bigger. The International Monetary Fund, which is holding its annual meetings in Washington this week, already predicts US debt will surpass 100% of gross domestic product next year. Deutsche Bank analysts also forecast the budget deficit will be between around 7% and 9% from 2026 through 2028, regardless of whoever is in the White House. The greater the deficit, the greater the issuance of bonds For more about the bond market selloff, check out Ruth Carson and Masaki Kondo's story today.

On the move

Precious metals are rising — with gold approaching a record — even as Treasury yields push higher. Usually, higher bond yields would hurt gold and silver prices, given that the metals pay no interest.  But with the US election two weeks away and another potentially disruptive Donald Trump term a distinct possibility, investors are seeking safety. There's worry over how strongly Israel will retaliate against Iran. Plus, the Fed has a decision to make about whether to keep on cutting interest rates. —Sybilla Gross and Jake Lloyd-Smith

Beating the street

US companies are reaping the biggest stock market reward in five years for beating profit expectations. S&P 500 members that posted better-than-estimated third-quarter earnings outperformed the benchmark by a median of 1.74% on the day of reporting results, according to data compiled by Bloomberg Intelligence. That's the strongest rate in BI's records going back to 2019. For example, Netflix surged 11% after beating expectations on subscriber additions. Wall Street banks rallied on strong profits, as did drugmaker Abbott Labs. At the same time, companies missing estimates trailed the S&P 500 by a median of 1.5%, a less severe underperformance than in the second quarter, the data showed. The trend will be put to the test again today, with GE, Lockheed Martin, GM, Kimberly-Clark, Norfolk Southern and Texas Instruments among the companies scheduled to report results. —Sagarika Jaisinghani

Global appetite

Wondering where all the money comes from to push up US stocks, week in, week out? The answer is everywhere. Investors in Europe and Asia-Pacific have sent about $147 billion to US equity-focused exchange-traded funds this year, already eclipsing the record $124 billion for all of 2021, according to data compiled by Athanasios Psarofagis of Bloomberg Intelligence. About $106 billion came from Europe and roughly $41 billion came from the Asia-Pacific region. While the inflows are less than the $500 billion sent by US buyers, it's another marker of demand in the bull run that has sent the S&P 500 up 23% this year. —Isabelle Lee  The election and your wallet The S&P 500 has been advancing at a pace of about 2% a month so far this year, and gold has enjoyed an even greater rally. Will those gains extend for another year after the next president takes the White House? What will be Bitcoin's trajectory, depending on whether Kamala Harris or Donald Trump win? Share your views in the latest MLIV Pulse survey.

Word from Wall Street "I think the stock market will do best if we basically vote for gridlock -- that whoever is in the White House doesn't have an open season to do whatever they want." Ed Yardeni Founder, Yardeni Research Watch the Bloomberg Television interview here.

What else we're reading

The secretive world of Russian oil tanker insurance revealed Japan's zombie companies may finally be tipped into bankruptcy Carmakers are mired in first Europe sales slump in two years Higher UK deficit piles pressure on chancellor before budget Musk's Trump support makes him the Democrats' new supervillain

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