Inside Markets — Yields and Commodity Prices

The disappointing NDRC press conference helps pause the post-payroll backup in bond yields, which allows high multiple stocks to recover. Of course, the NDRC press conference doesn’t have to be the end-of-the-line in terms of incremental stimulus measures and global funds are still very underweight China equities. Also, consider that fund flows over the holiday period can’t trade until tomorrow (10/9) with inflow estimates of CNY1T.

The ‘nothing done’ on fiscal stimulus takes some upward bias off Brent that also pulls back as the discretionary community fades yesterday’s short-covering rally. Systematic strategies that use simple buy/sell triggers were forced to cover short sales in yesterday’s break above the 100 and 200-day moving averages. The lack of an Israeli response thus far (Yom Kippur this Friday/Saturday) to Iran’s recent missile attack is also playing a role in today’s pullback in crude prices, but we expect crude will largely keep its geopolitical risk premium at least until the conflict is resolved.

Today’s broad sector participation (9 of 11 higher intraday) is somewhat encouraging after a brief period of consolidation. Last week, the SPX decelerated into technical resistance levels near ~5810, which remains the hurdle for the time being. We remain concerned about multiple contraction on a potential spike in volatility (VIX) but keep a tentative bullish bias at levels above ~5540. Now at 21.40, the VIX is at levels we consider ‘elevated’ with higher readings making rally attempts more challenging. The SPX was able to ‘earn’ its current multiple premium (~21x forward SPX EPS estimates) during a prolonged period of subdued volatility. Investors demand higher expected returns (equity risk premia) during times of elevated volatility and the current multiple is now ~6 turns above the long-term average.