US Market Wrap: S&P 500 hits fresh ATH as yields move lower

SNAPSHOT: Equities up, Treasuries up, Crude up, Dollar down, Gold up REAR VIEW: US Trade deficit widens; Fed's Daly sounds hawkish on inflation; Qatar said US and Iran are still engaged in talks; Iranian Minister said talks with the Emir of Qatar were “constructive”; Saudi Arabia confirms Jazan and Najran airports were hit by strikes; Saudi Energy Minister stated 5.8mln BPD is currently flowing through the East-West pipeline; New missile explosion reported at Saudi refinery; Average US 3yr note auction; RN leader Le Pen said France could face a default if President Macron policy continues COMING UP: Data: Swedish CPIF Prelim. (Sep). Events: NBP Policy Announcement (Oct), FOMC Minutes (Sep). Speakers: Fed's Logan; ECB's Cipollone, Vujcic. Supply: Australia, UK, Germany, US MARKET WRAP US indices mainly closed in the green amid risk-on trade, although the Russell 2000 lagged and saw losses. Given the sentiment, all sectors, aside from Health, saw gains, with Utilities and Consumer Discretionary outperforming as the former was buoyed by Constellation Energy surging as it entered into a power deal with Google. Given the aforementioned risk tone, Treasuries gained, largely tracking global benchmarks, as some of the European political woes eased on Tuesday. Precious metals firmed, while the crude complex saw two-way trade. For the energy space, there was little new, although the Saudi Energy Minister said 5.8mln BPD (vs capacity of 7mln BPD) is currently flowing through the East-West pipeline, and operations resumed around five days after the hit, albeit it is yet to be confirmed by an independent source or verification. In the FX space, the Dollar was lower and weighed on by wider moves as high-beta FX outperformed. The US data slate was pretty sparse as the US reported a wider-than-expected trade deficit and Fed speak came in the form of Daly and Schmid, with the latter striking a hawkish tone, albeit garnering little market reaction. US BALANCE OF TRADE: The US trade deficit widened sharply to USD 105.6bln in August (exp. USD 102.0bln), as imports rose 4.3% to USD 420.8bln while exports increased a more modest 1.4% to USD 315.2bln. The widening reflected the goods deficit increasing to USD 136.6bln, while the services surplus was little changed at USD 31.0bln. Under the hood, goods imports jumped USD 17.2bln, led by Industrial Supplies & Materials (+USD 9.1bln), including a USD 3.3bln increase in crude oil, while Capital Goods imports rose USD 6.2bln, including a USD 2.4bln increase in semiconductors and USD 1.3bln in other industrial machinery. Goods exports rose USD 4.4bln, primarily reflecting a USD 6.3bln increase in Industrial Supplies & Materials, including higher crude oil exports (+USD 2.0bln), while Capital Goods exports increased USD 1.3bln and Consumer Goods fell USD 2.2bln. Oxford Economics notes that the deficit was its widest since Q1 2025, partly reflecting an AI-driven surge in capital goods imports, and expects net trade to pose a sizable drag on Q3 GDP. However, Oxford expects roughly half of that drag to be offset by a 1.4ppt contribution from booming equipment investment, with healthy AI demand and inventory restocking expected to keep imports firm in the near term. Oxford adds that oil exports are unlikely to provide as much support as they did in Q2. FED'S DALY (2027 voter): Speaking to Axios, Daly said some companies are preparing for an AI-fueled chip squeeze that could push up prices far beyond the data centre boom alone. Daly expressed concern that AI, tariffs and higher energy costs could last longer than expected or compound each other, keeping inflation elevated and requiring more tightening. She noted that AI demand could spread beyond high-end chips before supply catches up, extending the shock beyond the period the Fed would normally expect to look through. Further, in reference to AI-driven pressure on chip and other tech prices, she said, "I see it less as a one-off." Daly said the Fed typically thinks in terms of shocks fading within one to three years, adding, "This is probably further out before we get relief." She also said, "It doesn't seem like the demand for AI is going down. If anything, it seems like it's going up." The biggest AI spending numbers are concentrated among hyperscalers, but plenty of other companies investing in the technology are more sensitive to borrowing costs. That means higher rates can still restrain the broader economy and inflation outlook, even if they do less to slow the firms at the centre of the boom. On policy, Daly noted, "I was very pleased, very supportive of the rate hike we took in September," adding that "whether more will be needed depends on the same set of conditions ... that I mentioned." FIXED INCOME T-NOTE FUTURES (Z6) SETTLED 9 TICKS HIGHER AT 104-16 Yields are lower across the curve, largely tracking global benchmarks. At settlement, 2-year -2.5bps at 4.787%, 3-year -3.1bps at 4.914%, 5-year -3.6bps at 5.023%, 7-year -3.9bps at 5.145%, 10-year -4.0bps at 5.267%, 20-year -2.6bps at 5.684%, 30-year -2.1bps at 5.640%. THE DAY: Treasuries rebounded on Tuesday, tracking gains across global bonds, with JGBs moving higher overnight following a strong Japan 10-year auction. Some follow-through was seen during the European morning as OATs rallied in the wake of Le Pen's draft budget, easing some of the recent French fiscal concerns. Meanwhile, oil prices were ultimately little changed after reversing overnight weakness. The initial downside may have reflected reports that the Saudi-backed coalition had reclaimed some key territory around the Bab el-Mandeb Strait, potentially improving shipping security, although Houthi media largely pushed back on claims of coalition advances. Meanwhile, a Saudi official suggested flows had restarted through the pipeline following the September 10th drone attack, with flows reportedly at 5.8mln BPD versus capacity of 7mln BPD. Nonetheless, crude subsequently reversed into positive territory. On Iran, reports noted the US and Iran remain engaged in talks, while Iran's Interior Minister said meetings with Qatar, a mediator between the US and Iran, were "constructive". US data had little impact. Weekly ADP Employment Change rose to 23.75k from 20k, while the August US trade deficit widened by more than expected as imports increased faster than exports, partly reflecting an AI-driven surge in capital-goods imports. Oxford Economics expects net trade to pose a sizeable drag on Q3 GDP growth, although it sees roughly half of this being offset by booming equipment investment. Fed speak saw Daly lean somewhat hawkish, citing inflationary concerns around AI - she is concerned that AI, tariffs and higher energy costs could last longer than expected or compound each other — keeping inflation elevated and requiring more tightening. Meanwhile, the US Treasury sold USD 58bln of 3-year notes. The modest 0.2bp stop-through and relatively low dealer allocation suggested the auction was comfortably absorbed, while the surge in direct demand was encouraging. However, the slightly below-average B/C and weak indirect participation prevented the auction from being characterised as particularly strong, despite the substantial yield pickup from last month's offering Supply Notes US sold USD 58bln of 3-year notes; Stop through 0.2bps. US to sell USD 39bln 10yr notes on October 7th; and USD 22bln 30 year bonds on October 8th; all to settle on October 15th Bills US sold 6-week bills at a high rate of 3.945%, B/C 2.78x US Treasury to sell USD 110bln of 4-week bills and USD 105bln of 8-week bills on October 8th; to sell USD 75bln of 17-week bills on October 7th; all to settle October 13th STIRS / OPERATIONS Fed Hike Pricing via CME FedWatch: Oct 4.9bps (prev. 6.0bps), Dec 25.5bps (prev. 27.1bps) EFFR at 3.88% (prev. 3.88%), volumes at USD 121bln (prev. USD 118bln) on October 5th SOFR at 3.89% (prev. 3.88%), volumes at USD 3.007tln (prev. USD 3.013tln) on October 5th NY Fed RRP op demand at 0.414 (prev. 1.00bln) across counterparties 16 (prev. 6) on October 6th Treasury Buyback [Liquidity support, 2-3-year nominal coupons, max USD 4bln]: Accepts USD 1.33bln of USD 14.76bln offers, accepts 12 of 33 eligible securities CRUDE WTI (X6) SETTLED USD 0.01 HIGHER AT 89.44/BBL; BRENT (Z6) SETTLED USD 0.26 HIGHER AT 100.58/BBL The crude complex saw two-way trade on Tuesday, but ultimately settled more-or-less flat. For a change, market-moving geopolitical headlines were a bit thinner, albeit still present, as traders continue to digest the current whereabouts of the US/Iran talks and position of either side. On the supply front, Al Hadath reported that the Saudi Energy Minister said 5.8mln BPD (vs capacity of 7mln BPD) is currently flowing through the East-West pipeline, and operations resumed around five days after the hit. Later reports, via Argus, suggested the pipeline sustained damage to three of the 11 pumping stations, but the pipeline itself was not damaged. Elsewhere, and prior to this, benchmarks saw modest upside after Saudi Arabia confirmed Jazan and Najran airports were hit by strikes on Monday. Regarding the position of talks, Qatar said the US and Iran are still engaged in talks, and the Iranian Minister says talks with the Emir of Qatar were “constructive”. However, in most recent trade, an explosion was heard on Qeshm Island, Iran, from the sea. US EIA STEO: 2026 world oil demand view 102.4mln BPD (prev. 102.6mln BPD), 2027 104.6mln BPD (prev. 105mln BPD) EQUITIES CLOSES: SPX +0.72% at 7,830, NDX +0.48% at 31,224, DJI +0.49% at 51,526, RUT -0.59% at 2,830 SECTORS: Health -0.15%, Communication services +0.16%, Financials +0.19%, Energy +0.44%, Technology +0.55%, Materials +0.65%, Industrials +0.9%, Consumer staples +0.96%, Real estate +1.13%, Consumer discretionary +1.39%, Utilities +3.01%. EUROPEAN CLOSES: European Closes: Euro Stoxx 50 +0.49% at 6,273, Dax 40 +0.82% at 25,462, FTSE 100 +0.42% at 10,542, CAC 40 +0.40% at 7,865, FTSE MIB +0.87% at 51,261, IBEX 35 +0.75% at 19,444, PSI +0.71% at 9,420, SMI +0.62% at 13,789, AEX +0.40% at 1,128 AMD (AMD): CEO Su said will substantially increase supply in '27 Constellation Energy (CEG), Alphabet (GOOG): Google enters into 3,590 MW power deal w/ CEG Option Care Health (OPCH): McKesson & Clayton Dubilier & Rice nearing deal to acquire Co. for >$5bln incl. debt Becton Dickinson (BDX): Will invest $3bln to expand US manufacturing of essential medical products Mattel (MAT): Ariel Investments urges Co. to explore strategic alternatives incl. asset sales, merger or sale AbbVie (ABBV): Next Q & FY profit guide underwhelms Corteva (CTVA): Upgraded at JPM Lenna (LEN): Berkshire Hathaway bought a further 2.4mln shares of Lennar last week and now owns a 12% stake in the Co., worth c. USD 2.2bln. Marvell (MRVL) sees an approx. USD 400bln total addressable market for the Co. by 2030; Expects approx. USD 20bln in total company revenue in FY28 (prev. saw USD 15bln). McDonald's (MCD) franchisees reportedly balk at the USD 800k bill to overhaul stores and worry about cost, details of "next plan"; has delayed franchisee tours of restaurant prototype, reports Bloomberg. Atlassian (TEAM) and OpenAI expand their partnership to turn enterprise knowledge into action. Morpheus Research short on Fervo (FRVO). FX USD was pressured as the bid in global bonds and risk-on across equities resulted in greater risk-appetite for other major currencies. As such, haven alternatives, CHF and JPY also lagged, with marginal weakness vs USD. Behind the downside in global yields was in initially in part due to retreating energy prices as the IEA's planned strategic release is having its desired effect and Saudi's East-West pipeline is reportedly still flowing, and also in part to French fiscal concerns taking a step back, although French yields remain volatile. The data calendar was quiet, and with the US admin still quiet on the Iran topic, Fed speak was the next topic to watch. Today, Daly, a 2027 voter, expressed concerns that AI, tariffs, and higher energy costs could keep inflation stickier than previously thought, requiring more tightening. Meanwhile, the 2028 voter, Schmid, sees a way to go to combat inflation, arguing work still to be done on short-term rates despite higher long-term yields. DXY now trades around lows of 101.75. NZD, GBP, CAD, and AUD led G10 gains. However, for GBP, Morgan Stanley recommends shorting GBP/USD ahead of the UK Budget. "We recommend short GBP/USD at 1.3220 with a target of 1.2850 and stop of 1.3350". Back to EUR, French debt was already bid heading into RN leader Le Pen’s announcement of an alternative budget, which was seen as optimistic. That said, calls for reigning in public spending and some openness to a wealth tax were accompanied by a lack of funding details. EUR/USD rose to a peak of 1.12768 before trimming to ~1.1261.