Yesterday, the Ten-year Treasury yields breached 5% for the first since 2007. Mizuho's Peter Chatwell pointed out that a higher 'risk-free' rate is likely to prompt investors to trim their exposure to riskier assets. This leads to more investors staying invested in bonds or money market funds rather than taking on elevated equity market risks, especially in a late-cycle environment. This is particularly pertinent as the US equity premium approaches the point of disappearing, as discussed in our earlier newsletters. Notably, yields on some BBB corporate bonds now exceed the expected earnings yield of the S&P 500, marking the first time this has happened since 2009.

Shortly after reaching 5%, yields slightly dropped from their 13-year high when Bill Ackman of Pershing Square announced that he had closed his short position against 30-year US Treasuries. The market interpreted this move as a potential signal that the bond slump might be coming to an end. Ackman expressed his view, stating, "There is too much risk in the world to maintain short positions in bonds at current long-term rates," in a message posted on X, formerly known as Twitter.

Federal Reserve Chair Jerome Powell was asked by Davin Westin of Bloomberg about the underlying reasons for the rise in yields. Here's what he had to say:
Markets and analysts are seeing the resilience of the economy to high interest rates and they’re revising their view about the overall strength of the economy and thinking even longer-term, this may require higher rates. That could be part of it. There may be heightened focus on fiscal deficits, that could be part of it. QT could be part of it. Another one you hear very often is the changing correlation between bonds and equities. If we are going into a world of more supply shocks rather than demand shocks, that could make bonds a less attractive hedge to equities and therefore, you need to be paid more to own bonds.
Earnings Unfolding:
Investors are penalizing U.S. firms that miss profit estimates by the most in four years, as reported by Bloomberg Intelligence. Approximately one-fifth of S&P 500 members have already reported their earnings, and shares of companies whose earnings fell short of expectations have, on average, underperformed the benchmark by a median of 3.7% on the day of their results, according to Bloomberg.

Corporate news
Chevron is set to acquire Hess in an all-stock deal valued at $53 billion, marking the second major oil industry deal this month. The purchase price of $171 per share represents a 4.9% premium over Hess's last closing price.
Hon Hai, an Apple supplier, experienced its most significant decline in three months after reports emerged that Chinese regulators are investigating its parent company, Foxconn, regarding taxes and land use. This development, combined with a series of arrests in various industries, has caused concerns among foreign firms.
Roche has agreed to purchase drugmaker Telavant for $7.1 billion. Stonepeak will acquire Textainer, providing the container lessor with an enterprise value of approximately $7.4 billion. Additionally, Vista is nearing a $4 billion buyout of business software firm EngageSmart, as reported by the Wall Street Journal.
SpaceX has signed an agreement to launch up to four of Europe's flagship navigation and secure communications satellites, as reported by the Wall Street Journal.
Commodities
Europe is contemplating whether to extend an emergency cap on gas prices due to concerns that conflicts and pipeline sabotage could lead to price increases this winter. The cap, which has been in effect, has shown "no indication of negative effects," with prices nearly 90% lower than the previous year - the FT reported.
China's purchases of Russian aluminum have reached an all-time high for the third consecutive month in September. Imports from Russia increased to nearly 153,000 tons and have nearly tripled over the year to date, reaching about 800,000 tons.
Oil prices could surge by 10$/barrel if the crisis in the Middle East worsens - RBC said. Meanwhile, copper prices have declined to their lowest point in almost 11 months, with global stockpiles reaching a two-year high.
Tech
Apple is planning to integrate AI tools into Siri, its music services, and various applications, with a projected annual investment of around $1 billion in AI technology. A more advanced version of Siri may become available as early as 2024, and AI enhancements are set to be incorporated into the upcoming version of iOS - Bloomberg reports.
Xbox and PlayStation will be “the most clear-cut beneficiaries of AI adoption in the game industry,” Morgan Stanley said. The tech may lower the cost of top-tier “AAA” games by up to 15%.
ESG
Asset managers are revising their bond models to account for climate risks, driven by a surge in the frequency of floods, fires, and storms that are impacting pricing models. Federated Hermes, for instance, has reduced its allocation to real estate credit, while Barclays predicts that mispriced nature-related risks could lead to sovereign downgrades.