So, what do we know?
(A forex, index, and commodity market review)
Another tough week for global markets as all major indices fell in response to the escalating conflict between Israel and the Hamas terrorists. Gold continues to benefit form this escalating global macro event which has also hit equities along with a further rise in sovereign bond yields.
Weekly change (amount change and percentage change on the week)
FTSE -206 -2.70%
DAX -318 -2.10%
DOW -540 -1.60%
S&P -101 -2.33%
NASDQ -400 -2.93%
NIKKEI -883 -2.76%
Hang Seng -697 -3.93%
The war between Israel and the Hamas terrorist group shows no sign of abating despite several world leaders heading out to the Middle East to show their support for Israel on the one hand but also looking to prevent an escalation of the conflict with the larger Hezbollah terrorist group based in southern Lebanon. The sight of conveys of aid lorries entering Gaza may help alleviate some o0f the suffering but the UN estimates that Gazans will need several hundred lorries in aid if they are to avoid further suffering in the face of the Israeli blockade.
Equity markets fell last week but the size of the fall does not reflect the potential for this war in Gaza to escalate significantly. Ruchir Sharma, writing in the FT, suggests that equity markets have likely reacted in a subdued fashion to the war because global macro / geopolitical events, such as this conflict between Israel and Hamas terrorists, tend to be overplayed and the effects are often reversed quite quickly.
For example, the 12% fall in US markets following 9/11 was reversed by October 11th. Sharma makes the point that dire threats and dire consequences are ever present but rarely come to pass. Geopolitical events, such as this conflict, create serious concern and worry for the global economy but the markets are implying that the consequences will not significant.
To underline this, the sovereign bond markets have not experienced a wave of safe haven buying as you might expect in such a crisis. The yield on the US 10-year bond is currently 4.98%, a week ago it was 4.41% , the same level it was at a month ago. So hardly a flight to quality that you might expect.
There was some better news from China, where the economy grew at 4.9% in the last quarter, better than 4.5% consensus forecast. Retails sales in China were also better than expected at +5.5%, beating the 5% forecast. This provides some relief for the Beijing administration as it grapples with the economic fallout from the property and housebuilding sector, which have accounted for up to 35% of growth previously. Evergrande has racked up debts of $340 billion over the past years and has no short-term solution to its problems as the property sector reels from years of over expansion. Country Garden, the largest private housebuilder, is likely to default on a tranche of its offshore bonds.
Here in the UK, last month’s inflation came in unchanged from the previous month although economists had expected a slight fall. Andrew Bailey, Governor of the Bank of England, said that inflation would continue to fall into the year-end with next month’s data expected to show a sharp fall as last years jump in energy prices fall out of the annual calculation. Good news for inflation watchers but it did little to help the markets with the FTSE shedding over 2.5% on the week, in the wake of falls in the US and other global markets and some below expectation retail sales data.
EURUSD +0.86 +0.82%
GBPUSD +0.21 +0.17%
USDJPY +0.27 +0.18%
The US Dollar gave back some ground last week as interest rate expectations subsided a modest amount in reaction to the jump in bond yields, which shows little sign of slowing. The market expects no change in rates on the 1st of November meeting of the FOMC, whilst expectations for a rate rise in December have fallen back to 25% from 35% a week ago. This may be just a pause in the US Dollar’s rise as JP Morgan and Citibank expect the EURUSD rate to fall to parity (1 to 1) by year end.
Gold +48 +2.48%
UK OIL +1.21 +1.35%
US OIL +1.55 +1.80%
Gold continues its sharp rise with another significant move last week, taking the precious metal close to the $2,000 level which was last hit in Mid-May. The reversal in the gold price is largely down to the Israeli / Hamas terrorist war although central bank buying, and Chinese demand have also exacerbated the move.
The 2,000 level will likely be challenged again this week following the significant bombardment of Gaza over the weekend and the news that Israeli aircraft attacked Hezbollah camps in Southern Lebanon.
Crude oil tacked on further gains but is showing signs of fatigue ahead of the $100 level.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
The markets are dominated by the uncertainty because of the Israeli / Hamas terrorists’ conflict and the risk of escalation. The markets have to take this day-by-day but there are other equally important known events for us to focus on.
Monday
No major releases scheduled for today.
Tuesday
UK UK Unemployment Claimant Count. Signs of a softening in the employment market.
US, EU and UK Flash Manufacturing and Services PMI data release. A slight pick-up in Manufacturing expected in both the Eurozone and UK regions although still mired below the 50 level. US services expected to dip below 50, the first time since January. US Dollar, Euro and GBP and US, Eurozone & UK assets sensitive.
Wednesday
Canada Bank of Canada policy decision. No change expected in the overnight rate as the bank remains prepared to raise rates if appropriate. In common with other Central Banks. The BoC is deciding to pause whilst the effects of previous rises take effect. CAD sensitive.
Eurozone Lagarde speaking at a dinner hosted by the Bank of Greece. Could be interesting ahead of Thursday’s rate decision.
Thursday
Eurozone ECB rate decision. Analysts expect no change in the REFI rate this time around as the middle east conflict adds to the uncertainty about economic activity. Euro and Eurozone assets sensitive to this release.
US Advanced reading of Q3 GDP. Expected at +4.3% as the US economy outperforms all its major competitors. A potential headache for the FOMC.
Friday
US Core PCE Price Index. Favoured measure of inflation used by the Federal Reserve. Expected +0.3%. nothing to suggest FOMC will hike rates fo0r one last time. Are we at the peak of the interest raising cycle? USD sensitive.
