We are witnessing significant volatility in US sovereign papers as they approach crucial psychological levels, forcing investors to make decisions. Just yesterday, the US 10-year yield briefly surpassed the 5% mark before sharply retreating. This move was attributed to short covering after bond bears Bill Ackman and Bill Gross announced that they had closed their short positions on US Treasuries. Ackman stated that “there is too much risk in the world to remain short bonds at current long-term rates.”
As a result, the US 10-year yield dropped below the 4.85% level. Nevertheless, concerns over rising US debt and increasing interest rates, which make the debt more expensive to finance, persist. US debt has increased by over $600 billion since crossing the $33 trillion mark, with a total increase of more than $2 trillion since the end of the debt ceiling crisis. The US has been accumulating approximately $22 billion in debt per day over the past month, equivalent to almost a billion dollars per hour. Furthermore, the Federal Reserve is no longer a major buyer of US debt, which could alleviate upward pressure on long-term yields near and above the 5% level. However, the yield curve is still expected to remain elevated, and further upward movement in the US 10-year yield cannot be ruled out, potentially ending the inversion of the 2-10-year portion of the yield curve.
A steeper yield curve does not necessarily bode well for the overall economy and stock valuations, unless the economy can withstand higher rates.
The S&P500 extended its losses below the 200-day moving average yesterday and is now approaching a significant technical support level at 4180, which represents the major 38.2% Fibonacci retracement of last year’s rally. This level will be crucial in determining the continuation of the current positive trend or a potential medium-term bearish reversal. On the other hand, the Nasdaq 100 managed to eke out a 0.30% gain yesterday ahead of earnings announcements from Microsoft and Alphabet scheduled after the market close today. Amazon will report its earnings on Thursday.
The combined earnings of the Big 5 tech companies in the S&P500 – Amazon, Alphabet, Apple, Microsoft, and Nvidia – are expected to show a 34% increase in Q3 compared to the same period last year. These companies carry significant weight in the major US indices, potentially providing investors with another reason to maintain their confidence in US stocks. However, it is worth noting that without the Big 5, earnings for S&P500 companies would be down by around 5%.
Big Oil, big purchases
Chevron announced its acquisition of Hess for $53 billion, or $60 billion including debt. Earlier this month, Exxon Mobil revealed its plans to acquire Pioneer Natural Resources for approximately $60 billion to expand its presence in the Permian Basin. These Big Oil companies possess substantial amounts of cash, which they either use for substantial share buybacks and attractive dividend payouts or for large-scale mergers. Both strategies are appealing to investors. Currently, climate change does not hinder the prosperity of these companies. On the contrary, these deals demonstrate the confidence of traditional energy companies in the industry and their preference for growing their core fossil fuel businesses rather than venturing into alternative energy sources. In line with this, Occidental Petroleum reportedly abandoned the world’s largest carbon capture plant project after spending over a billion USD to acquire a startup called Stratos.
In summary, big oil companies are stepping back from their climate goals and continue to invest in what brings profits: fossil fuels. The recent increase in oil prices also works in their favor. The US crude oil barrel price retreated to $86 per barrel this week due to limited escalation of tensions in Gaza and the release of two hostages by Hamas. However, the risk of a sudden surge in oil prices remains. If not, Saudi Arabia is likely to intervene and support oil bulls near the $80 per barrel level.
On a related note, according to the US Department of Energy, the US strategic petroleum reserves have approximately 17 days’ worth of supply. While the US produces enough oil to meet its energy needs, the limited stockpile of only 17 days could hinder Joe Biden’s ability to mitigate any significant price pressures in the future, especially if triggered by escalating tensions in the Middle East. Therefore, any sell-off in oil could present an interesting entry opportunity for those betting on higher and sustained oil prices due to supply restrictions and geopolitical tensions. I anticipate the US crude oil barrel price to fluctuate within the $80-100 per barrel range.
