Last week we argued that bond yields were peaking, that oil was the catalyst for a reversal and that a deal to reopen the Strait could come before the midterms. Yields went higher before they turned. The 10-year reached 5.3% on Wednesday, against 5.21% last Thursday, then bonds rallied (yields fell) after Fed Vice Chair Philip Jefferson said patience would be justified before hiking again. Last week we said the Fed would skip a hike in October. Markets now price in just a 28.2% chance of a 25bp hike this month, down from 68.6% a week earlier. However, there was no US-Iran deal this week, and oil rose on Thursday.
Our view has not changed. I think we are seeing peak yields in this phase and that a downside reversal is coming, with oil also vulnerable now to a sharp downward correction. On our long-term view, we see bonds remaining in a secular bear market, but the sell-off into year-end looks overdone, and Treasuries are currently heavily oversold. Crude from the Middle East is flowing at close to pre-war volumes, so the risk premium in Brent and WTI is vulnerable to a sharp correction if Iran and the US reach an agreement.
We remain of the view that we are still on track for a strong finish for equity markets into year-end. Valuations have come down in the US and in most international markets. Stocks and risk assets are relatively cheap, and that universe now includes bonds, which are oversold here. The US earnings season kicks off in a couple of weeks, and our base case is for the S&P 500 to break out of the range it has held since April. I would be putting cash to work nowand taking advantage of the poor sentiment and volatility. The ASX 200 fell 1.99% on Thursday as offshore investors sold on rising recession risk. We remain heavily positioned in resources.
The swing factor is oil. Our base case for a strong finish needs lower oil prices to materialise, and crude has not yet broken materially lower. On rates, we still see December as the Fed’s live meeting (rather than October), and we still think the RBA is one and done after Tuesday’s increase to 4.6%.
The Calls
The 30-year yield hit 5.62% intraday on Tuesday, the highest since June 2002, and the 10-year touched 5.29%, the highest since June 2007. Yields rose again on Wednesday despite a cooler PCE print. Thursday’s rally took the 2-year down 11bps to 4.78%, the 10-year to 5.24%, and the 30-year 2.5bps to 5.6%. The fall was outsized at the short end of the curve because expectations for an October hike receded.
Markets have memory in terms of support and resistance levels. With the breakout above 5%, the US 10yr has surged to 5.3% in recent weeks. I expect significant resistance at this level over the coming months, which might see the yield pullback sharply in the coming weeks. The 5.3% level capped the 10-year from 2000 to 2007. Lower bond vol would point to a lower reset in the US10yr yield, albeit into a higher range witha new floor at the 5% level.
Europe and the UK saw the same pressure. France’s 10-year yield reached about 4.395%, the highest since 2002, ahead of the government’s 2027 budget; German bund yields are at multi-year highs, and the UK 30-year gilt yield moved above 6% for the first time since 1998 before pulling back. Annual inflation accelerated in Germany, France and Italy, to 3.3%, 3.4% and 4.1%.
The PCE gauge rose 3.4% on an annual basis in August, below the 3.7% consensus. It is unlikely the Fed will move before the midterms next month, but the US2yr is priced on a yield of 4.78%, which implies 2 to 3 more hikes given the Fed Funds rate range is at 3.75%/4%. Payrolls, due Friday in the US, are expected to show 88,000 jobs added and unemployment at a one-year low of 4.1%. Stronger data would likely see expectations for a December rate hike dial up.
Oil is very much the catalyst for bonds currently, and supply improved through the week. Saudi Arabia has restored flows through its East-West pipeline, which bypasses the Strait, after a strike halted it on September 10. JPMorgan’s Natasha Kaneva estimates crude flows from the region have rebounded to 17.5m barrels a day, or 98% of pre-war levels, while product exports remain at 3m barrels a day, or 58%. Flows through Hormuz have nearly returned to late-June highs of nearly 13m barrels a day, though Kaneva cautions that higher crossings reflect the industry’s ability to operate under sustained risk rather than improved safety.
Oil prices have not followed the trajectory that the increase in supply would suggest yet. Oil rose on Thursday after China suspended fuel exports, and the Pentagon said it might deploy another aircraft carrier and 10,000 troops to the region. Kaneva sees current Brent prices of $104 a barrel as too high, with fair value closer to $90, or just under $80 for WTI. It is very hard to argue with that logic. I also want to emphasise that prior to the ME conflict, many commodity strategists were talking about a glut and crude prices headed towards $40. I don’t think Brent or WTI is going to return to those levels, but there is likely to be a coming reset sharply lower in crude prices that could trigger a big rally in bonds and financial markets generally.
The S&P 500 has moved sideways in recent months with significant rotation and corrections beneath the surface as the market digested volatile energy prices and surging bond yields. Our base case remains a topside breakout to new record highs, setting markets up for a strong finish into year-end.
The S&P 500 trades below 19 times forward earnings, the lowest since 2023, against a peak above 23 times last October. The 10-year yield averaged 6.65% through the 1990s, and the stock market generated substantial, positive returns over that decade, so current bond levels don’t exclude a strong run for equities. The midterms could also help if control of either house of Congress changes hands, as political gridlock has historically suited the stock market.
Japan was the Asian region’s standout this week. The Nikkei 225 rose 3.30% on Thursday to a six-week high of 68,956, led by chip stocks after Micron’s results. We have been overweight Japanese banks for several years. Morgan Stanley upgraded the sector this week, arguing the banks are moving from a rate-normalisation trade to a structural growth story driven by a once-in-30-years capex cycle, with a clear path to a sustainable 15% return on equity for the megabanks and a further re-rating of about 30%. The TOPIX Bank index has tracked sideways in a consolidation pattern since June. A series of higher reaction lows has been traced out in recent months above the uptrend line. Pressure is building below the 790 resistance level, which favours a coming topside breakout in my view. Members can review our current reports on the Japanese banks in the Global Equities report, which carry buy ratings.
China’s official manufacturing PMI returned to expansion at 50.1 in September from 49.8, and the Ministry of Finance signalled more fiscal support for consumption, private investment and local-authority spending. I think something big is coming down the line on the stimulus frontthat could echo what happened in 2024. The CSI 300 fell about 13% in the September quarter, and we expect a better showing into December. Mainland markets are closed for Golden Week until 7 October. Next week, I will be delving into China and the significant opportunity available in that market. We see many Chinese tech stocks like Alibaba and Tencent as undervalued at current levels.
The Local
The ASX 200 rallied 0.92% to 8,789 on Wednesday after softer inflation data, then fell 1.99% on Thursday to 8,614, its weakest close since mid-June, with every sector lower. Wednesday’s move looked to reflect offshore investors exiting Australian stocks on growing recession risk, a housing market in freefall and high inflation, and the Australian dollar slid sharply to US69.25c. The ASX 200 rebounded 0.8% on Friday to 8,682, with nine of 11 sectors higher. Information technology led, up 4.45%, with resources up 1.2% and the banks up 1.1%, while real estate fell 1.65% and health care 1.1%.
The RBA lifted the cash rate 25bps to 4.6% on Tuesday, its fourth increase this year. The unanimous decision reversed all of 2025’s easing and added an additional 25bps to take the rate to its highest since 2011, the highest among major developed-market central banks, though Iceland is still much higher at a whopping 8%! Governor Bullock pushed back on the idea that the overshoot was only about energy, pointing to slow productivity and government spending at its highest in four decades outside the pandemic. I think there is a good chance the RBA will be “one and done”, which is where our view is a big departure from consensus economist expectations.
Wednesday’s August CPI supported that view. Headline inflation rose to 4% from 3.5%, a tick under the 4.1% consensus, and the trimmed mean rose 0.2% for the month against a 0.3% forecast, holding the annual rate at 3.6%. This is the one the RBA watches most closely. Traders cut the odds of a November hike to around 20%.
Unemployment is at 4.6%, as the RBA expected, and the pain threshold Ms Bullock set out is 5%.Unfortunately for job seekers,I expect job losses to accelerate in the months ahead, which will leave them holding from here on in. Job vacancies eased 0.9% to 325,000 over the quarter to August. The bottom line is that we expect cracks in the job and housing markets to limit the RBA’s ability to raise rates as much as the market is pricing in currently, given employment is also a key objective.
Australian home prices are undergoing the most severe adjustment in decades, and the Government’s May budget forecast of a 2% peak-to-trough decline has been “blown out of the water”. Cotality data show home values fell 1.1% in September, the sixth straight monthly decline, leaving the national index 5.2% below its March peak. The falls have spread well beyond Sydney, with Brisbane down 1.5% in the month, and 97% of capital city suburbs lost value over the quarter. Sales over the past three months were 19.1% lower than a year ago, and homes are taking a median of 39 days to sell, up from 23.
Higher rates and the Budget’s changes to negative gearing and capital gains tax have cut investor demand to the bone. The national gross rental yield of 3.85% is below the 4.6% cash rate before any holding costs. HSBC forecasts a 13% national fall from the peak and Morgan Stanley 10% to 20%, though Cotality expects a gradual drift lower. For the banks, the near-term risk is slower credit growth rather than arrears, unless unemployment rises above 5%. Retailers exposed to people moving house, such as Harvey Norman, Nick Scali, JB Hi-Fi and Wesfarmers, face weaker demand. We have been cautious on discretionary.
Watch the political headlines next year, heading into the 2028 Federal Election. I would not be surprised if the government rolls back negative gearing and CGT policies introduced at this year’s budget. There is precedent. Bob Hawke did exactly that in 1988 after introducing similar policies in 1985.
The technical setup also favours upside risk for the ASX200 into year-end. We anticipate the resources sector to do much of the heavy lifting, but also some of the cheap industrials, and potentially the banks if expectations around more RBA rate hikes recede.
Report Spotlight
Northern Star (ASX: NST) – Buy
The local gold sector was back in the news. Northern Star revealed it had rejected a Gold Fields proposal worth $27 a share, or A$38.7bn, and Bloomberg reported Gold Fields may improve its bid. We see gold miners’ cash flows and earnings as undervalued across the sector and continue to lean positive on Northern Star.The board’s timing argument is strong. FY26 delivered record underlying profit of A$1.79 billion but only A$190 million of free cash flow after heavy capital spending. The large hedged book runs off through FY27 and FY28, and Fimiston mill spending is concluding. Gold Fields has returned with a higher offer before (The Gold Road takeover in 2025). We think NST is worth more.
Since our last update, Northern Star has outperformed the All Ords Gold Index. In recent weeks, NST has held above the primary uptrend but extended higher after breaking out of a converging triangle pattern that we flagged in earlier updates. Topside resistance near $24 is being tested, and we believe a breakout is approaching. Once confirmed, NST has scope to retest the record highs provided spot gold also soon resumes upward momentum – which is our base case.
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The full, more detailed versions of all these reports and many others spanning Australasia, Mining and Global Equities are available online for your reading pleasure. Links to the different landing areas for Members are at the bottom of the FatWrap.
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Key Market Insights and Stocks Covered This Week
Report Spotlight: Northern Star
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The Verdict
Last week we argued that bond yields were peaking, that oil was the catalyst for a reversal and that a deal to reopen the Strait could come before the midterms. Yields went higher before they turned. The 10-year reached 5.3% on Wednesday, against 5.21% last Thursday, then bonds rallied (yields fell) after Fed Vice Chair Philip Jefferson said patience would be justified before hiking again. Last week we said the Fed would skip a hike in October. Markets now price in just a 28.2% chance of a 25bp hike this month, down from 68.6% a week earlier. However, there was no US-Iran deal this week, and oil rose on Thursday.
Our view has not changed. I think we are seeing peak yields in this phase and that a downside reversal is coming, with oil also vulnerable now to a sharp downward correction. On our long-term view, we see bonds remaining in a secular bear market, but the sell-off into year-end looks overdone, and Treasuries are currently heavily oversold. Crude from the Middle East is flowing at close to pre-war volumes, so the risk premium in Brent and WTI is vulnerable to a sharp correction if Iran and the US reach an agreement.
We remain of the view that we are still on track for a strong finish for equity markets into year-end. Valuations have come down in the US and in most international markets. Stocks and risk assets are relatively cheap, and that universe now includes bonds, which are oversold here. The US earnings season kicks off in a couple of weeks, and our base case is for the S&P 500 to break out of the range it has held since April. I would be putting cash to work now and taking advantage of the poor sentiment and volatility. The ASX 200 fell 1.99% on Thursday as offshore investors sold on rising recession risk. We remain heavily positioned in resources.
The swing factor is oil. Our base case for a strong finish needs lower oil prices to materialise, and crude has not yet broken materially lower. On rates, we still see December as the Fed’s live meeting (rather than October), and we still think the RBA is one and done after Tuesday’s increase to 4.6%.
The Calls
The 30-year yield hit 5.62% intraday on Tuesday, the highest since June 2002, and the 10-year touched 5.29%, the highest since June 2007. Yields rose again on Wednesday despite a cooler PCE print. Thursday’s rally took the 2-year down 11bps to 4.78%, the 10-year to 5.24%, and the 30-year 2.5bps to 5.6%. The fall was outsized at the short end of the curve because expectations for an October hike receded.
Markets have memory in terms of support and resistance levels. With the breakout above 5%, the US 10yr has surged to 5.3% in recent weeks. I expect significant resistance at this level over the coming months, which might see the yield pullback sharply in the coming weeks. The 5.3% level capped the 10-year from 2000 to 2007. Lower bond vol would point to a lower reset in the US10yr yield, albeit into a higher range with a new floor at the 5% level.
Europe and the UK saw the same pressure. France’s 10-year yield reached about 4.395%, the highest since 2002, ahead of the government’s 2027 budget; German bund yields are at multi-year highs, and the UK 30-year gilt yield moved above 6% for the first time since 1998 before pulling back. Annual inflation accelerated in Germany, France and Italy, to 3.3%, 3.4% and 4.1%.
The PCE gauge rose 3.4% on an annual basis in August, below the 3.7% consensus. It is unlikely the Fed will move before the midterms next month, but the US2yr is priced on a yield of 4.78%, which implies 2 to 3 more hikes given the Fed Funds rate range is at 3.75%/4%. Payrolls, due Friday in the US, are expected to show 88,000 jobs added and unemployment at a one-year low of 4.1%. Stronger data would likely see expectations for a December rate hike dial up.
Oil is very much the catalyst for bonds currently, and supply improved through the week. Saudi Arabia has restored flows through its East-West pipeline, which bypasses the Strait, after a strike halted it on September 10. JPMorgan’s Natasha Kaneva estimates crude flows from the region have rebounded to 17.5m barrels a day, or 98% of pre-war levels, while product exports remain at 3m barrels a day, or 58%. Flows through Hormuz have nearly returned to late-June highs of nearly 13m barrels a day, though Kaneva cautions that higher crossings reflect the industry’s ability to operate under sustained risk rather than improved safety.
Oil prices have not followed the trajectory that the increase in supply would suggest yet. Oil rose on Thursday after China suspended fuel exports, and the Pentagon said it might deploy another aircraft carrier and 10,000 troops to the region. Kaneva sees current Brent prices of $104 a barrel as too high, with fair value closer to $90, or just under $80 for WTI. It is very hard to argue with that logic. I also want to emphasise that prior to the ME conflict, many commodity strategists were talking about a glut and crude prices headed towards $40. I don’t think Brent or WTI is going to return to those levels, but there is likely to be a coming reset sharply lower in crude prices that could trigger a big rally in bonds and financial markets generally.
The S&P 500 has moved sideways in recent months with significant rotation and corrections beneath the surface as the market digested volatile energy prices and surging bond yields. Our base case remains a topside breakout to new record highs, setting markets up for a strong finish into year-end.
The S&P 500 trades below 19 times forward earnings, the lowest since 2023, against a peak above 23 times last October. The 10-year yield averaged 6.65% through the 1990s, and the stock market generated substantial, positive returns over that decade, so current bond levels don’t exclude a strong run for equities. The midterms could also help if control of either house of Congress changes hands, as political gridlock has historically suited the stock market.
Japan was the Asian region’s standout this week. The Nikkei 225 rose 3.30% on Thursday to a six-week high of 68,956, led by chip stocks after Micron’s results. We have been overweight Japanese banks for several years. Morgan Stanley upgraded the sector this week, arguing the banks are moving from a rate-normalisation trade to a structural growth story driven by a once-in-30-years capex cycle, with a clear path to a sustainable 15% return on equity for the megabanks and a further re-rating of about 30%. The TOPIX Bank index has tracked sideways in a consolidation pattern since June. A series of higher reaction lows has been traced out in recent months above the uptrend line. Pressure is building below the 790 resistance level, which favours a coming topside breakout in my view. Members can review our current reports on the Japanese banks in the Global Equities report, which carry buy ratings.
China’s official manufacturing PMI returned to expansion at 50.1 in September from 49.8, and the Ministry of Finance signalled more fiscal support for consumption, private investment and local-authority spending. I think something big is coming down the line on the stimulus front that could echo what happened in 2024. The CSI 300 fell about 13% in the September quarter, and we expect a better showing into December. Mainland markets are closed for Golden Week until 7 October. Next week, I will be delving into China and the significant opportunity available in that market. We see many Chinese tech stocks like Alibaba and Tencent as undervalued at current levels.
The Local
The ASX 200 rallied 0.92% to 8,789 on Wednesday after softer inflation data, then fell 1.99% on Thursday to 8,614, its weakest close since mid-June, with every sector lower. Wednesday’s move looked to reflect offshore investors exiting Australian stocks on growing recession risk, a housing market in freefall and high inflation, and the Australian dollar slid sharply to US69.25c. The ASX 200 rebounded 0.8% on Friday to 8,682, with nine of 11 sectors higher. Information technology led, up 4.45%, with resources up 1.2% and the banks up 1.1%, while real estate fell 1.65% and health care 1.1%.
The RBA lifted the cash rate 25bps to 4.6% on Tuesday, its fourth increase this year. The unanimous decision reversed all of 2025’s easing and added an additional 25bps to take the rate to its highest since 2011, the highest among major developed-market central banks, though Iceland is still much higher at a whopping 8%! Governor Bullock pushed back on the idea that the overshoot was only about energy, pointing to slow productivity and government spending at its highest in four decades outside the pandemic. I think there is a good chance the RBA will be “one and done”, which is where our view is a big departure from consensus economist expectations.
Wednesday’s August CPI supported that view. Headline inflation rose to 4% from 3.5%, a tick under the 4.1% consensus, and the trimmed mean rose 0.2% for the month against a 0.3% forecast, holding the annual rate at 3.6%. This is the one the RBA watches most closely. Traders cut the odds of a November hike to around 20%.
Unemployment is at 4.6%, as the RBA expected, and the pain threshold Ms Bullock set out is 5%. Unfortunately for job seekers, I expect job losses to accelerate in the months ahead, which will leave them holding from here on in. Job vacancies eased 0.9% to 325,000 over the quarter to August. The bottom line is that we expect cracks in the job and housing markets to limit the RBA’s ability to raise rates as much as the market is pricing in currently, given employment is also a key objective.
Australian home prices are undergoing the most severe adjustment in decades, and the Government’s May budget forecast of a 2% peak-to-trough decline has been “blown out of the water”. Cotality data show home values fell 1.1% in September, the sixth straight monthly decline, leaving the national index 5.2% below its March peak. The falls have spread well beyond Sydney, with Brisbane down 1.5% in the month, and 97% of capital city suburbs lost value over the quarter. Sales over the past three months were 19.1% lower than a year ago, and homes are taking a median of 39 days to sell, up from 23.
Higher rates and the Budget’s changes to negative gearing and capital gains tax have cut investor demand to the bone. The national gross rental yield of 3.85% is below the 4.6% cash rate before any holding costs. HSBC forecasts a 13% national fall from the peak and Morgan Stanley 10% to 20%, though Cotality expects a gradual drift lower. For the banks, the near-term risk is slower credit growth rather than arrears, unless unemployment rises above 5%. Retailers exposed to people moving house, such as Harvey Norman, Nick Scali, JB Hi-Fi and Wesfarmers, face weaker demand. We have been cautious on discretionary.
Watch the political headlines next year, heading into the 2028 Federal Election. I would not be surprised if the government rolls back negative gearing and CGT policies introduced at this year’s budget. There is precedent. Bob Hawke did exactly that in 1988 after introducing similar policies in 1985.
The technical setup also favours upside risk for the ASX200 into year-end. We anticipate the resources sector to do much of the heavy lifting, but also some of the cheap industrials, and potentially the banks if expectations around more RBA rate hikes recede.
Report Spotlight
Northern Star (ASX: NST) – Buy
The local gold sector was back in the news. Northern Star revealed it had rejected a Gold Fields proposal worth $27 a share, or A$38.7bn, and Bloomberg reported Gold Fields may improve its bid. We see gold miners’ cash flows and earnings as undervalued across the sector and continue to lean positive on Northern Star. The board’s timing argument is strong. FY26 delivered record underlying profit of A$1.79 billion but only A$190 million of free cash flow after heavy capital spending. The large hedged book runs off through FY27 and FY28, and Fimiston mill spending is concluding. Gold Fields has returned with a higher offer before (The Gold Road takeover in 2025). We think NST is worth more.
Since our last update, Northern Star has outperformed the All Ords Gold Index. In recent weeks, NST has held above the primary uptrend but extended higher after breaking out of a converging triangle pattern that we flagged in earlier updates. Topside resistance near $24 is being tested, and we believe a breakout is approaching. Once confirmed, NST has scope to retest the record highs provided spot gold also soon resumes upward momentum – which is our base case.
Everything in this fatLITE is the surface. The full reports, macro commentary, model portfolio, and buy recommendations are members-only. Try it with our 30-day money-back guarantee.
The full, more detailed versions of all these reports and many others spanning Australasia, Mining and Global Equities are available online for your reading pleasure. Links to the different landing areas for Members are at the bottom of the FatWrap.
Have a great weekend.
Carpe Diem!
Angus
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