Are Stock Markets Still Overvalued?

Economic

Stocks

Summary:

Stock markets have retreated lately, as bond yields stormed higher. But equity valuations are still stretched and earnings growth is stagnant. Sky-high yields and global slowdown could keep markets under pressure.

Stocks drop as yields soar

The phenomenal rally on Wall Street lost some steam in the third quarter, mostly because of the seismic moves in bond markets. Yields on U.S. government bonds have risen to their highest levels since the financial crisis, boosted by bets that interest rates will remain higher for longer and an increase in debt issuance to fund massive government deficits.

When bond yields climb so aggressively, that puts pressure on riskier plays such as stocks. Higher yields essentially attract investors to bonds and reduce speculation in other markets. If investors can buy a safe U.S. government bond that pays a return of 4.75% per year, like they can today, they are less likely to take wild chances in other assets. In theory, that dampens demand for stocks, which are considered riskier investments.

Therefore, the ferocious spike in yields helped spark a correction in equities. However, the correction has not been dramatic. Both the S&P 500 and the tech-heavy Nasdaq have declined 8% from their summer highs, which is a relatively small move considering just how high yields have gone.

Valuations are still excessive

Despite the recent retreat, equity valuations are still stretched by historical standards. The S&P 500 is currently trading at 18 times what analysts project earnings to be over the next twelve months. That's under the assumption that earnings are going to grow 12% next year.

Such a high valuation would make sense if bond yields were extremely low, like most of the past decade. But yields are high and rising. The last time yields were so elevated, back in 2007, the stock market was trading for less than 15 times earnings. And those levels themselves represented a market top as the 2008 financial crisis followed, decimating stock prices. In other words, valuations have not truly compressed even though yields have risen so sharply.

Similarly, the assumption by analysts that profit growth is set to reaccelerate is questionable. Earnings have essentially been flat for three quarters now. While it is true that the U.S. economy has performed better than expected lately, the global picture is quite bleak with both Europe and China losing steam at an alarming pace.

Companies listed on the S&P 500 derive almost 40% of their revenue from overseas, a number that increases to 60% for the tech sector that has carried the market higher this year. As such, a global slowdown will impact U.S. corporate earnings even if the U.S. economy itself remains resilient. And the strength in the dollar could exacerbate this effect.

Therefore, the question is whether corporate earnings growth can truly fire up by 12% heading into a global economic slowdown. It's crucial to note that this reacceleration is already baked into earnings forecasts, so the risk is that reality does not live up to these rosy projections.

Will something break?

Now to be clear, all this doesn't mean some catastrophic market crash is imminent. What it means is that equity risks seem tilted to the downside, as valuation multiples still don't properly reflect the spike in yields and earnings forecasts appear overly optimistic.

A simple valuation exercise will make this view clearer. If S&P 500 earnings growth next year is only 5%, then earnings would reach 232. Assuming also that the market reverts back to a more ‘normal' valuation multiple of around 16x, multiplying the two together would result in an S&P 500 price of 3,712, which is almost 13% below current levels. Of course, this is only a mental exercise, but it helps illustrate the point.

What could prove this view wrong? The two main upside risks for stocks would be if yields cool down again or if earnings growth exceeds analyst expectations. With the global economic outlook turning darker and U.S. student debt repayments restarting this month, a tremendous surge in earnings appears unlikely.

That leaves a pullback in yields as the most likely saving grace for stocks. For that to happen though, some unforeseen shock might be required that fuels speculation of imminent Fed rate cuts or liquidity injections. In other words, equity markets probably need an ‘accident' to breathe a sigh of relief, similar to the U.S. regional banking crisis earlier this year.

The question is whether any such relief will last or whether it will be overshadowed by the accident itself this time.

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Devin

Economic

In July this year, Nuremberg's mayor celebrated the final beam being placed atop the redeveloped Quelle building, a monumental 1950s symbol of postwar Germany's economic revival.

Revamped with offices, shops and homes, a big part of the giant complex was slated to open in 2024.

In recent weeks, however, the site's developer Gerch Group, which has €4 billion (US$4.2 billion) of projects under construction, has filed for insolvency proceedings, along with one of its project companies linked to the development. The opening date's now in doubt.

It's yet another blow to a property market that's reeling from the end of the cheap-money era, but it also shows who's most vulnerable to the shakeout. While investor fears during the current real estate crisis have centered on landlords, the travails of Gerch and its ilk show that developers — the firms that own the building projects — are the ones in imminent danger.

"Project developers are struggling with the increased construction costs, increased interest rates and the drop in prices," says Marlies Raschke, cohead of restructuring and insolvency at law firm Noerr. "We've seen several of them filing for insolvency in the last weeks and we expect more."

Alongside Gerch, Munich's Euroboden, which touts star architects such as David Chipperfield among its collaborators, is in preliminary insolvency proceedings. Project Immobilien Group also filed for insolvency in August along with many of its project companies, with some of the work being tendered for new contractors, according to a spokesperson for the preliminary administrator. The three firms didn't respond to requests for comment.

Developers around the world face similar woes. In Australia, Porter Davis is among homebuilders that have gone into liquidation this year after surging costs and falling demand.

In Sweden, a rise in bankruptcies has been driven by a construction slump, while in Finland housing starts could plunge to levels not seen since the 1940s, according to the country's construction lobby.

It's a rapid change in fortunes after the years of rock-bottom interest rates, when money poured into property as investors hunted for yield. Developers like Gerch could comfortably load up projects with cheap debt and sell into a market where prices just kept rising.

The mood's very different now. German real estate transactions for offices are at their lowest point on a 12-month rolling basis since at least 2014, according to property firm Savills.

Vonovia SE, a big landlord, warned in its financial results that new construction developments are "barely viable."

"The speed of correction is significant," says Henning Koch, boss of Commerz Real, one of Germany's biggest property investors. "The recession in the German real estate market started one and a half years ago and now in the last 2-3 months we've seen more and more developers go bust."

Developers are particularly vulnerable because of a collapse in land values, which makes projects riskier. As interest rates have soared, investors have demanded higher rental yields to compensate, which in turn pushes down the price they'll pay for a finished site. Construction costs are also spiraling and developers are having to put more money aside for unexpected expenses.

Taken together, all these factors depress the underlying value of developer land. It upends the economics of property development, too, with the price drop meaning some companies may lose money just by finishing a building.

In one example Aggregate Holdings SA, the diminished real estate empire run by Cevdet Caner, had to hand over the keys of Berlin's QH Track project to creditor Oaktree Capital Management. Hit by cost overruns, it tried to negotiate with lenders to fund the project through to completion but the talks failed.

Unfinished state

Germany's development boom was fueled in part by mezzanine lenders including Corestate Capital who were willing to make chunky loans to developers with little equity. That worked when part-built or yet-to-start projects could be forward sold to pension funds happy to pay ahead for a completed site.

The market correction has left developers without agreed forward sales in limbo, saddled with pricey debt and runaway costs.

"Normally we're looking for fresh money from the existing financing parties — from shareholders, investors — to try to complete the project," says Christoph Morgen at Brinkmann & Partner, who's acted as an insolvency administrator for some smaller developers. "It usually causes a loss of time, it interrupts the building process. And all the time, it's getting more expensive."

Creditors are taking note. One senior German banker says their bank is trying to establish ties to some of the country's stronger developers, so it can tap them to take over if a building runs into trouble.

Grandiose developments in an unfinished state can also become civic eyesores, and a political problem if left dormant too long. In Nuremburg the mayor's office says it's "confident" the Q project will continue, after receiving positive noises from the various owners of the different parts of the vast complex.

"The owners want to realize their projects without consideration of Gerch Group's insolvency," the mayor's office says in a statement. "On the city's side, we support by continuing all planning and administrative processes."

Pensioner pain

The exposure of retail investors and smaller pension funds, who piled into real estate during the boom times, adds another awkward political dimension. Their involvement can make negotiations complicated, especially if new money's needed.

Noerr's Raschke says German pension funds — such as those for doctors, lawyers or dentists — may be limited in providing more liquidity for regulatory reasons.

Source: Bloomberg

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Stocks

As the UK enters Q4 2023, there are several positives to consider. CPI inflation, while still much higher than the target 2%, has fallen to 6.7% from a high of 11.1% in October 2022.

The base rate stands at 5.25%, and while Bank of England officials have hinted one more rate rise is likely, the central bank paused at the last Monetary Policy Committee meeting. And further rises beyond this final one is now considered unlikely.

Moreover, revised economic data from the Office for National Statistics shows that the UK has experienced faster growth than either France or Germany since the end of 2019. Even though growth is still relatively lacklustre, the UK's economy has grown by 1.8% since the covid-19 pandemic began — compared to a previous estimate of a 0.2% contraction. In addition, the economy grew by 0.3% in Q1 2023, up from the previous estimate of 0.1% growth.

While the HS2 cancellation adds further weight to the argument that the UK is becoming a less certain place to invest, it's worth remembering that many of the country's economic problems are global in nature.

Regarding the best UK shares, much of the recent falls can be attributed to the rout in the bond markets — pushing up the price of the US Dollar and lowering the price of oil. And while the bond problem is global, UK 30-year borrowing costs are now at their highest since 1998, with the yield on 30-year government bonds at 5.115% according to Refinitiv.

There are two important implications to consider: first, the bond market movements imply that inflation will be stickier and therefore rates will stay high for longer, even if they are near their peak. Second, governments in the UK and elsewhere now have much less room for tax cuts or increased spending, making generating growth even harder than previously assumed.

Of course, this is an oversimplification, but worth bearing in mind when considering an investment. And remember, past performance is not an indicator of future returns.

Best UK shares to watch

Tesco

Tesco shares rose sharply this week after interim results saw the UK's largest grocer's retail LFL sales rise by 7.8%, with ‘volume and sales mix trends ahead of expectations.' Accordingly, retail adjusted operating profit rose by 13.5% to over £1.4 billion, with Tesco bank operating profit up 25% to £65 million, primarily driven by strong income growth.

In statutory terms, revenue was up by 5% at actual rates to £34.1 billion, while operating profit more than doubled to nearly £1.5 billion, but this is mostly a reflection of the comparative period's £626 million impairment charge. And it even managed to grow its market share by 30bps, with gains both online and in shops.

Further, net debt improved by £605 million since year-end, with the net debt/EBITDA ratio now at just 2.3x. Tesco also announced an interim dividend per share of 3.85p — in line with the dividend policy. In April 2023, the FTSE 100 grocer announced a plan to buy back £750 million of shares by April 2024 — this plan is going well, with £503 million of shares purchased in H1.

Tesco now expects to generate retail free cash flow of between £1.8 billion and £2 billion this year, ahead of its medium-term guidance range of £1.4 billion to £1.8 billion. CEO Ken Murphy highlighted ‘the strong performance in the first half of the year. Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year.'

AllianceBernstein analyst William Woods noted that the results ‘should be received positively given the concerns around sector profitability amid fears of deflation, which we don't think is a material risk.'

Aviva

Aviva shares jumped this week after Jefferies upgraded the insurer from ‘buy' to ‘hold' with a 480p price target — shares are now changing hands for 387p. The analysts forecasted ‘Aviva to deliver a best-in-class capital return yield, underpinned by excess capital and the strongest free cash flow amongst peers.' Further, it noted that Aviva's earnings should start shifting towards a capital-light business, improving its prospects as market conditions improve.

Jefferies is forecasting a whopping £5.3 billion of capital returns between 2023 and 2026, equivalent to half of the company's current market capitalisation. This estimate is fortified by its all-important 2023 forecast 205% Solvency II ratio. And the analysts also think that Aviva could choose to sell off its operations in China and India for circa £1 billion, which could go back to shareholders.

In recent half-year results, Aviva's operating profit rose by 8% to £715 million, and its interim dividend per share was upped by 8% to 11.1p after buying back £300 million of shares in H1.

CEO Amanda Blanc's turnaround plan has clearly worked so far — and the CEO enthused that the insurer has more possible growth areas. Indeed, private health insurance sales shot up by 58% to £86 million, and the company has signed up another 17,000 health insurance customers over the past year. Blanc notes that there ‘has been significant growth in demand for things like digital GP.'

Superdry

Unlike defensive sector-based Tesco and Aviva, Superdry shares have fallen by 65% year-to-date to just 48p. However, the stock rose this week after the company revealed it had agreed to sell its intellectual property assets in three South Asian countries.

It expects to receive £30.4 million from the resulting new £40 million joint venture — though retains a 24% shareholding over the JV in partnership with Reliance Retail who will hold 76%. The company plans to use the proceeds to boost its liquidity and fund its turnaround plan.

Superdry was suspended from trading at the end of August due to issues with its full-year results audit. However, it has now resumed trading after announcing a £21.7 million pre-tax adjusted full-year loss — compared to a £21.6 million profit in the prior financial year.

It's worth noting that CEO Julian Dunkerton is now back at the helm — and the £48 million company delivered full-year revenues of £622.5 million. Poor weather and a cost-of-living crisis may be compounding problems, but there may be an opportunity for higher risk investors.

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FastBull Featured

Daily News

[Quick Facts]

1. Former BOJ official expects the BOJ to consider fine-tuning YCC and forward guidance.

2. Fitch downgrades the U.S. leveraged loan default rate and postpones the U.S. recession forecast to H1 next year.

3. Trump says he will temporarily be the House Speaker.

4. Fed's Daly says rising bond yields may mean the Fed can stay on hold.

5. U.S. bond traders are betting historic sums on the November Fed meeting.

6. Biden's debt cancellation will benefit a total of 3.6 million eligible Americans.

7. U.S. initial jobless claims edge up.

[News Details]

Former BOJ official expects the BOJ to consider fine-tuning YCC and forward guidance

Former Bank of Japan (BOJ) official Kazuo Momma noted that the Bank of Japan may discuss the need to fine-tune its forward guidance as well as its yield curve control (YCC) policy at its meeting later this month. The central bank may discuss whether the current yield ceiling is justified if upward pressure increases in the future, Kazuo Momma said. Given the recent rise in yields, the depreciation of the yen, and continued stronger-than-expected inflation, the BOJ could act again, but this is not his basic forecast scenario. Commenting on potential measures, Kazuo Momma said the BOJ could raise the level of interest rates for its daily bond-buying operations from 1%, or raise its target for 10-year bond yields to 0.25% and also raise the upper limit of the volatility range.

Fitch downgrades the U.S. leveraged loan default rate and postpones the U.S. recession forecast to H1 next year

Rating agency Fitch Ratings said it has revised its FY23 institutional leveraged loan (LL) and high-yield bond (HY) default forecasts downwards to 3.0%-3.5% from 4.0%-4.5% for leveraged loans, and to 3.0%-3.5% from 4.5%-5.0% for HY. Key factors behind the downward revision include better-than-expected U.S. economic growth in 2023 and improved conditions for high-risk issuers on the market's watch list over the past year.

Fitch's default forecasts for FY24 LL and HY remain unchanged at 3.5%-4.5%. The macroeconomic environment has not proved to be as bad as previously expected. Fitch's economic team recently adjusted its view on the timing of the U.S. recession to the first half of 2024.

Trump says he will temporarily be the House Speaker

Former U.S. President Donald Trump said he would accept being speaker of the House of Representatives until they find a new speaker. This followed the removal of U.S. House Speaker Kevin McCarthy. House rules do not require the speaker to be a sitting member. "I have been asked to speak as a unifier because I have so many friends in Congress," Trump said, "If they don't get the vote, they have asked me if I would consider taking the speakership until they get somebody longer-term, because I am running for president."

Both Representative Steve Scalise, the majority leader, and Representative Jim Jordan, the Judiciary Committee chairman, are vying for the position, but Trump has not endorsed either of them.

Fed's Daly says rising bond yields may mean the Fed can stay on hold

San Francisco Fed President Richard Mary Daly said on Thursday that as U.S. monetary policy moves deeper into restrictive territory, much progress has been made toward achieving the 2% inflation target, and U.S. Treasury yields have risen recently, so the Fed may not need to raise interest rates again.

If we continue to see the labor market cool down and inflation fall back toward our target, we can keep rates stable and allow the effects of policy to play out. As long-term interest rates have risen in recent weeks, the need for us to take further action has diminished because financial markets are already moving in that direction, and they've down the work.

But she also kept open for further rate hikes if necessary.

U.S. bond traders are betting historic sums on the November Fed meeting

According to CME Group, the number of open interest in the federal funds futures market betting on the November rates soared to nearly 600,000 contracts on Wednesday, the most in the market's 30-year history. The record number means each basis point change in rates could affect $25 million, and most of the contracts are betting on rising rates.

Biden's debt cancellation will benefit a total of 3.6 million eligible Americans

In an effort to ease the financial burden on American students, President Joe Biden plans to announce another $9 billion in student debt relief after the Supreme Court blocked his earlier plan to eliminate a large amount of student debt. The White House revealed that the package, to be announced at 1 p.m. ET, would bring total student debt relief under the Biden administration to $127 billion, benefiting nearly 3.6 million Americans.

The new relief package is divided into three main parts: (1) $5.2 billion in additional debt relief for 53,000 borrowers under Public Service Loan Forgiveness programs. (2) Nearly $2.8 billion in new debt relief for nearly 51,000 borrowers through fixes to income-driven repayment. These are borrowers who made 20 years or more of payments but never got the relief they were entitled to. (3) $1.2 billion for nearly 22,000 borrowers who have a total or permanent disability who have been identified and approved for discharge through a data match with the Social Security Administration;

Biden emphasized again his commitment to providing student loan relief, especially after his previous plan was blocked by the Supreme Court. This new initiative is designed to correct the problem and provide a "lifeline" for thousands of Americans struggling with student debt.

U.S. initial jobless claims edge up

U.S. jobless claims remained at a historically low last week, underscoring a still strong labor market. A resilient labor market continues to fuel consumer spending in the face of high inflation and high interest rates. Business demand for workers remains strong, and layoffs, which were "hot" earlier this year, have largely begun to diminish. On an unadjusted basis, initial jobless claims fell to their lowest level in a year.

[Focus of the Day]

UTC+8 20:30 U.S. Non-Farm Payrolls (Sept)

UTC+8 00:00 Next Day: Fed Governor Waller speaks

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SAXO

Economic

Forex

NFP Preview: Hot as JOLTS or cool as ADP?

Despite some respite, risks around the selloff in the U.S. Treasuries continue to dominate markets. Labor market data remains heavily in focus this week and Treasury yields are showing an increasing sensitivity to that. 10-year yields jumped 7bps to 4.74% after Tuesday’s JOLTS data showed job openings were higher than expected, but slid 5bps on the release of ADP data yesterday which showed headline job growth fell below expectations. Given the volatility around JOLTS and the lack of ability of ADP to predict NFP, it is surprising that bond markets have been reacting sharply to these releases, and sets the stage for a potentially significant reaction on Friday’s jobs report as well.

U.S. non-farm payroll report usually contains a number of significant releases, as discussed in this primer. With disinflation in progress, market will likely focus a lot more on headline job growth and the unemployment rate rather than the average hourly earnings, or the wage growth. The job market is weakening, although the pace remains modest for now. Job growth potentially remained supported in the last few month amid anticipated summer travel demand and the demand from concert tours. September data may show that the labor market cooled following the summer demand bump. However, if the headline remains strong, further drilling may be needed. Gains will have to be spread across sectors to send any signals that the job market may be re-heating, which remains unlikely in our view. Signals from ISM services, particularly the new orders component, also suggest that the U.S. economy may be on a weaker footing from here.

Yields Could Be Highly Sensitive to Non-Farm Payrolls_2

The other key number of watch out for will be the participation rate, which has been rising since the pandemic-lows, and saw gains to 62.8% in August from 62.6% prior. As household budgets get stretched and credit cards get maxed out, more of the voluntary retirees could be looking to return to labor force. Jump in participation rate could help to boost the headline job growth while also potentially lowering the unemployment rate, but this can be a misleading sign. In addition, the effect of UAW strikes may not show up in the jobs report yet, but remains a drag for Q4.

Antipodeans: Growth divergence in focus

Both the RBA and RBNZ meetings this week ended in no changes to cash rate and continuation of the data-dependent mode. The tone from Australia’s new governor, Michele Bullock, was one of conviction that inflation will return to target. Australia’s economy is also losing stream, with retail sales plunging and consumer confidence taking a hit as labor market cools. Meanwhile, China story continues to remain underwhelming, providing little comfort for AUD. As global risk sentiment takes a hit, either because of the rapid sell-off in bond markets, or due to the concerns around the fallout from the high real rates, there remain little reasons to be optimistic on AUD in the short-run. Headline inflation could, however, see a bump higher due to the gasoline prices and the quarterly print due at the end of October could see some additional pricing for the RBA rate hike, but global sentiment will likely remain more of a factor.

RBNZ statement was also less hawkish than expected, and the bar for an additional rate hike will likely remain high. However, higher-for-longer could stick longer for the RBNZ compared to RBA, given NZ’s Q2 GDP witnessed a strong expansion. Terms of trade comparison between the antipodean currencies is shown in the chart below, and also suggests that improving NZ terms of trade could be a positive for NZD vs. other commodity currencies. Yields Could Be Highly Sensitive to Non-Farm Payrolls_3

Yields Could Be Highly Sensitive to Non-Farm Payrolls_3

Elections are being held in NZ on October 14, which can bring some volatility for NZD. The opposition National Party seems to be leading the polls, which could be a positive for NZD if a clear or coalition government could be formed.

Market Takeaway: Growth differentials could bring further downside in AUDNZD to test 1.0650 or go further down to May lows of 1.0560. If oil prices go lower, NZDCAD or NZDNOK could also be prone to more upside.

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Owen Li

Energy

Economic

Global crude oil prices could drop to about US$60 per barrel by 2027 as demand growth slows, say oil analysts at Rystad Energy, chopping a third off next year's peak price as demand tumbles.

Their outlook is a reassuring message amid recent Wall Street analysts predicting up to US$150 per barrel in the next two years. Rystad's long-term forecast calls for prices to peak next year at $91 per barrel before dropping to as much as US$50.

"Demand is peaking," Claudio Galimberti, Rystad's head of North America Research, said on Thursday at an event in Houston. "We anticipate prices to taper off in the next three to four years, primarily due to ample supply."

Oil producers' group OPEC+ has succeeded to moving oil prices this year by cutting output, but that strategy can not succeed long term, he said.

Global oil demand growth, which averaged 3.7 million barrels per day (bpd) last year, should decelerate to 2.4 million bpd this year, 1.2 million bpd in 2025, and just 500,000 bpd in 2026, Galimberti said.

Prices beyond 2026 will reflect the pace of the world's energy transition to cleaner energy and the level of investments in new fossil fuel production, he added.

Rystad projects Brent crude could resume moving up after 2027, above US$50 per barrel, assuming a base-case scenario where the world's temperature rises by 1.9 degrees Celsius over pre-industrial levels by 2050.

Shale wins on higher prices

Rystad predicts that US oil production will climb to 15 million bpd by 2026, up from about 13 million bpd currently, before reaching a plateau.

OPEC's current market strategy has been effective because US supply elasticity is not as high as it was 10 years ago, said the former Shell manager who contributed to the development of the oil giant's Energy Transition Scenarios. But its effectiveness will end if US shale producers drill more.

If Brent oil prices were to remain at an average of US$80 per barrel after 2026, shale producers would resume investments, Galimberti said. And when that happens shale could deliver as much as 18 million barrels per day, he estimated, decreasing OPEC's influence over prices.

"This is a strategy OPEC can pursue for one year, but not for seven years," Galimberti said. "If oil prices remain elevated, US shale would be the clear winner," Galimberti said.

Modest growth

Rystad expects modest growth in the US shale industry in the near-term with 60-70 drilling rigs to be added by next year, bringing the total to 634 rigs.

That would still be 70 rigs short of US peak levels, as companies continue to prioritize shareholder returns through dividends and buybacks, according to the consultancy's head of shale research, Alexandre Ramos-Peon.

"There is no more elasticity at all due to capital discipline," he said on the sidelines, adding that reinvestment rates are rising but still low compared to historical standards.

But US shale growth will still come due to improvements in drilling efficiency, said Supply Chain Research head Justin Mayorga said.

"We are getting better at drilling wells, and quicker," he said. "Modest slow growth is going to be a continuing message."

Source: Reuters

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Economic

Stocks

U.S. equities in sharp decline

U.S. equities experienced a sharp decline overnight as yields surged, following a red-hot JOLTS opening report that reinforced the message from the recent FOMC meeting regarding the need for higher rates over a longer period.

The JOLTS job openings for August surged to 9610k, a "mere" four standard deviations above the consensus median outcome of 8815k, with job openings returning to their highest level since May. Fed Chair Jerome Powell's favored metric of job openings per unemployed remained elevated at 1.52.

Hawkish Fed and high stakes

This week, hawkish Fed remarks, coupled with a stronger-than-expected ISM print and JOLTS job opening data, placed added significance on Friday night's Non-Farm Payroll report. However, before that, the market must assess the impact of the removal of House Speaker Kevin McCarthy, which raises the odds of a government shutdown when temporary funding expires on 17th November, along with the release of the ISM services PMI this evening.

We maintain the view that the interest rate market is too complacent about the possibility of one final rate hike before year-end, which is currently about 50% priced in (13 basis points) by year-end.

What to expect from ISM services PMI

Date: Thursday, October 5th at 1 am AEDT

In August, the services PMI unexpectedly rose to 54.5 from 52.7 in July. It marked the fastest rate of growth in the services sector in six months, with robust increases in new orders (57.5 vs. 55), employment (54.7 vs. 50.7), and inventories (57.5 vs. 50.4).

For the month of September, the market anticipates the services PMI to ease to 53.5 from 54.5. If the services PMI does not cool as expected, it will further contribute to the reasons behind this week's yield surge and potentially undermine risk sentiment.

S&P 500 technical analysis

U.S. Equity Indices Jolted by Jobs Data and House Speakers Removal_2

Since early September, we have opined that the S&P 500 was missing another leg lower towards 4250/4000 as part of the correction that began in July.

The tentative signs of support noted within that range last week have been negated after the S&P 500 rejected resistance from the August 4335 low and broke below uptrend support at 4250 from the October 3491 low.

If the S&P 500 now fails to hold above the 200-day moving average at 4200 (on a closing basis), it negates the view that the pullback from the July high was corrective and warns of a potential impulsive Wave III decline towards 3900.

Nasdaq technical analysis

Similar to the S&P 500 and in our previous reporting, we have suggested that the Nasdaq could experience another leg lower towards 14,200/14,000 as part of the correction that began in July.

The Wave C pullback from the early September high of 15,618 (as part of a three-wave Elliott Wave ABC correction) has yet to reach the ideal pullback zone and seems to be missing a final leg lower (minor Wave V).

If this pullback unfolds as expected, we anticipate a recovery that could push the Nasdaq to test and surpass the highs of July, possibly setting up a challenge to the 2021 bull market high of 16,764.

To stay updated on all economic events of today, please check out our Economic calendar

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