The Election, Israel-Iran Conflict, and Bond Vigilantes: What's Next?
The upcoming election is a major focus, but other significant events are also unfolding, including the conflict between Israel and Iran, and the reemergence of bond vigilantes.
Israel-Iran Conflict
Recently, Israel launched retaliatory strikes on Iran, as reported by our Geopolitical Intelligence Group. The retaliation was limited and Israel claims to have significantly impaired Iran's ability to identify and target Israeli fighters and missiles. Iran, on the other hand, asserts that they successfully prevented most of the munitions from reaching their intended targets and that the damage was minimal.
Regardless of which side is telling the truth, it seems neither party is interested in escalating the situation further. While there have been some war preparation calls from Iran, it's uncertain if either side truly wants to escalate the situation at this time.
The situation is likely to revert back to proxies and oil prices may decline due to this controlled retaliation. However, this does not necessarily mean a cessation of hostilities, and buying oil on any dip could be a good strategy.
Bond Vigilantes: Back on the Scene
Bond vigilantes seem to have resurfaced. From a fundamental standpoint, Treasuries and bond yields are at the higher end of my range. The Federal Reserve's cut projections have approached our base case.
However, there are concerns. Last autumn, we observed Treasury yields consistently rising. Bad news for bonds drove yields much higher, while good news only briefly lowered yields before they climbed again. A similar pattern was observed earlier this year.
There are several similarities between then and now, such as potential inflation risks and the debt ceiling debate. Positioning also plays a role, with many missing the rally and underestimating how low yields would get. This likely resulted in most shorts being stopped out, reluctant buyers being pulled in, and momentum buyers building up.
The election could also impact bond markets. Regardless of who wins, higher debt is likely. Policies like student loan forgiveness essentially shift individual debt to taxpayers. Any form of "sweep" could spook bond markets and lead to much higher yields.
Foreign selling could also be a factor, with geopolitical tensions possibly leading to more foreign sales. For instance, China, which is launching its own stimulus, may further reduce their holdings.
While betting against the bond vigilantes seems counterintuitive, owning some options to protect against a move to much higher yields could be wise.
Earnings and Market Movements
Large moves post-earnings are being observed, often significant enough to move the entire market. Several key market leaders are reporting earnings this week, which could potentially drive the overall market higher. However, the market seems to favor bears, especially if bond vigilantes continue to "win".
The Election: What to Expect?
With the election just over a week away, there are only two certainties: Academy Securities and members of our Geopolitical Intelligence Group will be ringing the bell on the New York Stock Exchange on the morning of November 6th, and I will be guest hosting Bloomberg TV’s election coverage from 9pm to 10pm ET on election night.
Betting markets like Polymarket, Kalshi, and Predictit currently show Trump in the lead. However, these markets have their issues, including potential manipulation, difficulties in translating prices into odds, and the fact that in betting, one dollar equals one vote, which could skew results.
On the other hand, betting markets might provide a better assessment of what is happening at the Electoral College level compared to current polling.
For undecided voters, the decision could be challenging. Most undecided voters who are registered are likely considering voting against their party's presidential nominee for various reasons. This could lead to a lot of split tickets and potential gridlock.
Regardless of who wins, the winner will likely do less than what they promised on the campaign trail. What will matter is whether the winner can create and execute a vision.
Bottom Line
While the election is a major focus, bond vigilantes and earnings could be bigger market drivers as we head into the end of the month. What are your thoughts on these developments? Share this article with your friends and sign up for the Daily Briefing, which is every day at 6pm.
The Election, Israel-Iran Conflict, and Bond Vigilantes: What's Next?
The upcoming election is a major focus, but other significant events are also unfolding, including the conflict between Israel and Iran, and the reemergence of bond vigilantes.
Israel-Iran Conflict
Recently, Israel launched retaliatory strikes on Iran, as reported by our Geopolitical Intelligence Group. The retaliation was limited and Israel claims to have significantly impaired Iran's ability to identify and target Israeli fighters and missiles. Iran, on the other hand, asserts that they successfully prevented most of the munitions from reaching their intended targets and that the damage was minimal.
Regardless of which side is telling the truth, it seems neither party is interested in escalating the situation further. While there have been some war preparation calls from Iran, it's uncertain if either side truly wants to escalate the situation at this time.
The situation is likely to revert back to proxies and oil prices may decline due to this controlled retaliation. However, this does not necessarily mean a cessation of hostilities, and buying oil on any dip could be a good strategy.
Bond Vigilantes: Back on the Scene
Bond vigilantes seem to have resurfaced. From a fundamental standpoint, Treasuries and bond yields are at the higher end of my range. The Federal Reserve's cut projections have approached our base case.
However, there are concerns. Last autumn, we observed Treasury yields consistently rising. Bad news for bonds drove yields much higher, while good news only briefly lowered yields before they climbed again. A similar pattern was observed earlier this year.
There are several similarities between then and now, such as potential inflation risks and the debt ceiling debate. Positioning also plays a role, with many missing the rally and underestimating how low yields would get. This likely resulted in most shorts being stopped out, reluctant buyers being pulled in, and momentum buyers building up.
The election could also impact bond markets. Regardless of who wins, higher debt is likely. Policies like student loan forgiveness essentially shift individual debt to taxpayers. Any form of "sweep" could spook bond markets and lead to much higher yields.
Foreign selling could also be a factor, with geopolitical tensions possibly leading to more foreign sales. For instance, China, which is launching its own stimulus, may further reduce their holdings.
While betting against the bond vigilantes seems counterintuitive, owning some options to protect against a move to much higher yields could be wise.
Earnings and Market Movements
Large moves post-earnings are being observed, often significant enough to move the entire market. Several key market leaders are reporting earnings this week, which could potentially drive the overall market higher. However, the market seems to favor bears, especially if bond vigilantes continue to "win".
The Election: What to Expect?
With the election just over a week away, there are only two certainties: Academy Securities and members of our Geopolitical Intelligence Group will be ringing the bell on the New York Stock Exchange on the morning of November 6th, and I will be guest hosting Bloomberg TV’s election coverage from 9pm to 10pm ET on election night.
Betting markets like Polymarket, Kalshi, and Predictit currently show Trump in the lead. However, these markets have their issues, including potential manipulation, difficulties in translating prices into odds, and the fact that in betting, one dollar equals one vote, which could skew results.
On the other hand, betting markets might provide a better assessment of what is happening at the Electoral College level compared to current polling.
For undecided voters, the decision could be challenging. Most undecided voters who are registered are likely considering voting against their party's presidential nominee for various reasons. This could lead to a lot of split tickets and potential gridlock.
Regardless of who wins, the winner will likely do less than what they promised on the campaign trail. What will matter is whether the winner can create and execute a vision.
Bottom Line
While the election is a major focus, bond vigilantes and earnings could be bigger market drivers as we head into the end of the month. What are your thoughts on these developments? Share this article with your friends and sign up for the Daily Briefing, which is every day at 6pm.
