Morning Notes — Lower Yields

US equities are mostly lower with Health Care, Energy and Materials outperforming, while Communication Services (GOOGL) and Tech (MSFT) retreat. Treasury yields are lower with curve flattening. The dollar Index is also lower against most currencies. Gold is up +0.95%, while WTI crude gains +3.3% after inventory data. Lower bond yields and an emerging potential shift in central bank policy offsets weaker than expected earnings overnight. The Bank of Canada raised rates by 50bp vs. expectations for a 75bp hike, adding support to market anticipation of an evolution in Fed policy. This follows the RBA’s dovish hike from October 4, but tomorrow’s ECB meeting is still expected to deliver a 75bp hike and a discussion on QT. Lower nominal bond yields are also the product of the recent fiscal U-turn in Britain with 10-year Gilt yields lower for a third consecutive session.  Eurozone yields are also lower with a corresponding decline in natural gas prices helping to cool inflation concerns. US equity markets are resilient despite disappointing Tech results overnight from FFIV, GOOGL, MSFT, SPOT, STX and TXN. Earnings-related outperformance this morning for shares of AMP, BA, BSX, CB, CHEF, CSGP, ENPH, HOG, JNPR, NSC, R, ROP, UHS, V and WING, while AIZ, AVY, BXP, CMG, EQR, LRN, MANH, MAS, MNRO, ODFL, SKX and TNET trade lower with the aforementioned Tech stocks. Busy afternoon of earnings due with highlights including BMRN, F, FLEX, KLAC, META, NOW, OLN, UCTT, URI, VFC and WOLF.

SPX: The S&P 500 (SPX) is building upon its bullish technical setup with popular CTA buy triggers located just above 3900. Momentum buying from these systematic strategies could carry the index to 4000 but sustained closing levels beyond that likely require further repricing of terminal rate expectations toward 4.5%. The +7.5% rally from the mid-October low to current levels has come as terminal rate expectations declined to 4.84% today from a peak of 5.02%.

More: Terminal rate expectations and bond yields are the most important factors for near-term market behavior. But the move through 3900 becomes more difficult after last night’s earnings disappointments from GOOGL and MSFT. These two companies make up 9.27% of the SPX by weight, with the likelihood of breaking through 3900 largely dependent on AAPL and AMZN results due tomorrow after the close. Those two companies make up 10.31% of the SPX.