(Bloomberg) -- Bonds maintained losses and US stocks struggled as traders mulled prospects for a slower pace of Federal Reserve rate cuts. Asian shares looked set for a mixed open. 

Stocks opened higher in Sydney, while futures pointed to gains in Hong Kong and a decline in Tokyo. US contracts edged lower after downbeat news on some key companies in late hours, while the S&P 500 closed little changed. Treasury 10-year yields hovered near 4.2% after topping that level for the first time since July as a rout in bonds spread globally. Australia’s equivalent was steady in early trading. 

Wall Street is paring back bets on aggressive policy easing as the US economy remains robust while Fed officials sound a cautious tone over the pace of future rate decreases. The prospect of bigger fiscal deficits after the upcoming presidential election are only compounding the market’s concerns. Since the end of last week, traders have trimmed the extent of expected Fed cuts through September 2025 by more than 10 basis points.

“Of course, higher yields do not have to be negative for stocks. Let’s face it, the stock market has been advancing as these bond yields have been rising for a full month now,” said Matt Maley at Miller Tabak + Co. “However, given how expensive the market is today, these higher yields could cause some problems for the equity market before too long.”

Exposure to the S&P 500 has reached levels that were followed by a 10% slump in the past, according to $Citigroup Inc(C-N)$. strategists. Long positions on futures linked to the benchmark index are at the highest since mid-2023 and are looking “particularly extended,” the team led by Chris Montagu wrote.

A $600 billion exchange-traded fund tracking the S&P 500 (SPY) wavered after the close of regular trading. Texas Instruments Inc. gave a downbeat outlook for the current period even after topping estimates. Starbucks Corp. pulled guidance for 2025 after sales plunged for a third consecutive quarter. McDonald’s Corp. slumped as its Quarter Pounders were linked to an E. Coli outbreak in the western part of the US.

Treasury 10-year yields edged higher to 4.21%. The euro hit the lowest since early August amid bets the European Central Bank will keep lowering rates. Options traders are increasing bets that Bitcoin will reach $80,000 by the end of November no matter who wins the US election.

Oil fell in early trading after advancing Tuesday as traders tracked tensions between Israel and Iran. Gold was little changed after climbing to a fresh record.

In Japan, Tokyo Metro Co.’s stock is primed for healthy gains when trading starts on Wednesday. The company raised ¥348.6 billion ($2.3 billion) in Japan’s largest initial public offering since mobile carrier SoftBank Corp. listed in 2018. 

The US stock market has rallied this year thanks to a resilient economy, strong corporate profits and speculation about artificial-intelligence breakthroughs — sending the S&P 500 up over 20%. Yet risks keep surfacing: from a tight US election to war in the Middle East and uncertainty around the trajectory of Fed easing.

“While recent data indicate a more resilient US economy than previously thought, the broad disinflation trend is still intact, and downside risks — albeit lower — to the labor market remain,” said Solita Marcelli at UBS Global Wealth Management. “We continue to expect a further 50 basis points of rate cuts in 2024 and 100 basis points of cuts in 2025. This should bring Treasury yields lower.”

Most Fed officials speaking earlier this week signaled they favor a slower tempo of rate reductions. Policymakers at their meeting last month began lowering rates for the first time since the onset of the pandemic. They cut their benchmark by a half percentage point, to a range of 4.75% to 5%, as concern mounted that the labor market was deteriorating and as inflation cooled close to the Fed’s 2% goal. 

“We can point to a few reasons for the rise in global long rates but one possibility is that markets are giving a big thumbs down to central banks easing policy before we’ve seen a sustainable drop in inflation.” said Peter Boockvar author of The Boock Report. “I remain bearish on the long end and bullish on the short end.”

The last time US government bonds sold off this much as the Fed started cutting interest rates, Alan Greenspan was orchestrating a rare soft landing.

Two-year yields have climbed 34 basis points since the Fed reduced interest rates on Sept. 18 for the first time since 2020. Yields rose similarly in 1995, when the Fed — led by Greenspan — managed to cool the economy without causing a recession. 

In prior rate cutting cycles going back to 1989, two-year yields on average fell 15 basis points one month after the Fed started slashing rates.

Meanwhile, the International Monetary Fund said the US election is creating “high uncertainty” for markets and policymakers, given the sharply divergent trade priorities of the candidates. That gap creates the risk of another potential round of volatility on global markets similar to the rattling August selloff.

“Presidents don’t control markets,” said Callie Cox at Ritholtz Wealth Management. “Over time, the stock market’s common thread has been the economy and earnings, not who’s in the Oval Office. Be prepared for mood swings in markets as we get closer to Election Day. But remember that election-fueled storms often dissipate quickly.”

Key events this week:

Some of the main moves in markets:

Stocks

Currencies

Cryptocurrencies

Bonds

Commodities

This story was produced with the assistance of Bloomberg Automation.

©2024 Bloomberg L.P.