Its been another crazy week on the markets, with a still-jittery bond market clouding the outlook for a rally in U.S. stocks.
Stocks and bonds have been in a tight relationship over the last few months, with the S&P 500 index surging nearly 7% in the last 10 sessions while the benchmark 10-year Treasury yield has tumbled from a 16-year high to 4.657. Helping market sentiment on Friday was a steadier US Treasury market.
After yields tumbled on Wednesday and surged on Thursday, they were little changed on Friday. The yield on the 10-year was 3 basis points higher in a late move, after having been little changed most of the session. Oil also steadied after a bout of volatility with Brent retaking the $US80 a barrel level. Gold was lower with the futures sitting at 1942.60, down 1.38% on the day, while Iron ore extended its rally, pressing through $US128 a tonne in Singapore.
At the same time, the Cboe Volatility Index,, which measures expectations for stock gyrations, has fallen to a seven-week low of 14.17. While such a retreat in Wall Street’s “fear gauge” would normally be a green light for stocks, there’s a catch: it has not been reflected in the most closely watched measure of Treasury volatility expectations, the MOVE index, which remains near its recent high.
Plus, Moody’s on Friday lowered its outlook on the U.S. credit rating to “negative” from “stable” citing large fiscal deficits and a decline in debt affordability, a move that drew immediate criticism from President Joe Biden’s administration. The move follows a rating downgrade of the sovereign by another ratings agency, Fitch, this year, which came after months of political brinkmanship around the U.S. debt ceiling.
Bargain hunters are swirling around beaten-down shares of U.S. banks, even as skeptical investors say the sector’s problems are likely to persist for some time. The S&P 500 bank index is down around 11% in 2023, a year that began with the failure of Silicon Valley Bank and several other lenders in the worst banking crisis since 2008. The broader S&P 500, by contrast, is up around 15%.
Bank stocks are at an all-time low compared with the S&P 500 based on relative prices, according to data from BofA Global Research. That tumble has made their valuations attractive to some investors: the sector trades at eight times forward earnings, less than half of the 19.7 valuation of the S&P 500.
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