The sudden and substantial attack launched by Hamas on Israel during the early hours of last Saturday morning has introduced a highly destabilising element into the global geopolitical landscape. The attack, involving a significant missile barrage and the infiltration by militants through various means, was followed by an aggressive counter-offensive by Israel. The timing of the attack by Hamas, which coincided with the Jewish holiday of Shemini Atzeret and Simchat Torah, caught Israeli defense forces off guard, prompting a swift declaration of a state of war by Israeli Prime Minister Benjamin Netanyahu. This declaration has led to the extensive mobilisation of Israeli reserves and the initiation of “Operation Swords of Iron”.
The United States (US) swiftly responded to the situation, with National Security Advisor Jake Sullivan and the National Security Council spokesperson, Adrienne Watson, unequivocally condemning the attacks by Hamas. The US Defence Secretary, Lloyd Austin, also expressed a commitment to work with Israel to ensure its defence needs are met, which may have broader implications for East-West tensions.
This sudden escalation in the Middle East conflict threatens to affect global financial markets significantly. So far, the effect of this conflict, and other areas of geopolitical tension such as the Russia-Ukraine conflict, China-Taiwan disputes, and the U.S.-China relationship have been largely overshadowed by concerns of a global economic slowdown due to high inflation and central banks tightening monetary policies. However, should Iran and the US become actively involved in the conflict, one can expect an escalation in risk aversion, leading to higher commodity prices, with gold and oil directly affected. Safe-haven assets, including the US dollar and US Treasuries, are likely to strengthen as investors become increasingly risk-averse.
Risk assets, which are already facing the prospect of a slowing global economy, may now exhibit increased volatility as the situation develops. This unexpected escalation in the Middle East has the potential to destabilise not only the region but also the global economic and geopolitical landscape.
A LOOK AT THE DATA
The number of Americans filing for unemployment benefits held steady at 209,000 for the week ending 7 October, close to its recent low, and below market expectations. Continuing claims increased slightly to 1,702,000. This data indicates a tight US labour market, allowing for continued high interest rates.
In September 2023, US producer price inflation was 2.2%, exceeding expectations, while US inflation remained at 3.7% in September, defying expectations of a decrease. A smaller decline in energy prices offset slowing inflation in other categories. Minutes from the September Federal Open Market Committee (FOMC) meeting revealed the majority of policymakers favour further rate hikes to curb inflation as well as keeping rates higher for longer. However, Fed officials also noted uncertainties regarding the economy, oil prices, and financial markets, emphasising the need for caution when considering additional policy tightening.
Investors also assessed the minutes from the European Central Bank (ECB) meeting. ECB members were divided on whether to raise interest rates or pause the current tightening cycle, with the deteriorating economic situation in the eurozone making this choice a close call.
In the United Kingdom (UK), gross domestic product (GDP) saw modest growth of 0.2% in August, in line with expectations and rebounding from a revised 0.6% contraction in July, primarily driven by the expansion of the services sector. The economy’s trade deficit widened. Manufacturing production increased by 2.8%, however manufacturing output declined for a second consecutive period. The persistence of high inflation and ongoing recession-related risks have raised concerns among British policymakers as they prepare for the upcoming interest rate decision in November. The Bank of England’s (BoE) Katherine Mann has expressed support for further policy tightening to promptly bring inflation down to the 2% target, while, fellow BoE policy maker Swati Dhingra is advocating for a rate cut if the growth rate falls below expectations.
EQUITY MARKET INSIGHTS
On Thursday, US stock markets displayed a mixed performance. The Dow Jones saw a decline of over 170 points, the S&P 500 dipped by 0.6%, and the Nasdaq fell 0.63%. This shift in investor sentiment was driven by increasing expectations of another interest rate hike later in the year, prompted by a consumer price index (CPI) report indicating higher-than-expected inflation. Swap contracts tied to future US Federal Reserve (Fed) rate decisions led to an increased probability of a quarter-point hike in December, pushing the odds to around 50%, up from around 30% the day before. In corporate news, Ford Motor’s shares fell more than 2% due to a strike initiated by the United Auto Workers (UAW) members at its largest plant. In terms of earnings reports, Delta Air Lines posted better-than-expected results, while Domino’s Pizza’s disappointed.
Across the pond, the United Kingdom’s (UK’s) FTSE 100 index climbed 0.3% to surpass the 7,640 level on Thursday, building on strong gains earlier in the week. Markets continued to evaluate the latest economic data for insights into the policy path of major central banks. The UK’s GDP expansion in August encouraged equity buying in London, with notable gains across various sectors including energy where producers like BP and Shell saw increases of 3% and 1%, respectively.
In European markets, gains were trimmed back on Thursday afternoon, with Frankfurt’s DAX 40 edging up by just 0.1% to 15,470 points. The unexpected resilience of US inflationary pressures had a dampening effect on European sentiment. On the corporate front, producer of sugar-related products Suedzucker garnered attention by more than doubling its quarterly profits and raising its full-year earnings forecast. Additionally, the market watched semi-conductor manufacturer, Infineon, after a revenue warning from its smaller Swiss competitor, VAT. Communications group Publicis bolstered its 2023 sales and margin forecasts after it exceeded quarterly expectations. On the flip side, telecoms giant Ericsson reported a decrease in core profits in the third quarter, and flavour and scents manufacturer Givaudan’s third quarter sales also fell slightly short of market expectations. In merger and acquisition news, gas spring manufacturer Stabilus agreed to acquire a business unit of US manufacturer Dover for $680 million.
In Japan, the Nikkei 225 Index surged by 1.75% to close at 32,494, with the broader TOPIX Index gaining 1.5% to reach 2,342 on Thursday. These gains marked their highest levels in nearly two weeks, influenced by positive cues from Wall Street, as minutes from the Fed’s last meeting reinforced expectations of steady interest rates next month, despite the Central Bank’s narrative of higher interest rates for longer and another potential rate hike in December.
COMMODITY MARKET HIGHLIGHTS
Gold remained below $1,880/ounce on Thursday. Despite maintaining a two-week high, boosted by investors turning to safe-haven assets amid the ongoing conflict in the Middle East, it was slightly weakened as investors digested the latest US economic data. Higher US interest rates diminish the attractiveness of holding non-yielding bullion.
West Texas Intermediate Crude futures rebounded, surpassing $84/barrel on Thursday, following a greater than 2% drop in the previous session. This resurgence was fuelled by signals of cooperation between Saudi Arabia and Russia to stabilise the oil market. The two countries expressed their commitment to taking proactive measures to maintain market stability during a joint appearance on Russian TV. Meanwhile, investors closely monitored developments in the Israel-Hamas conflict. Notably, data from the industry indicated a substantial increase of 12.94 million barrels in US crude inventories last week, far exceeding the expected 1.3 million barrel build. Official data from the Energy Information Administration (EIA) was set to be released later on Thursday.
Copper futures traded above $3.60/pound, extending a rebound from a four-month low of $3.56/barrel on 5 October. This rise was driven by several factors, including a weaker dollar, positive industrial demand outlook, and supply concerns. Improved Purchasing Mangers’ Index (PMI) data from China supported expectations of robust industrial activity, in line with forecasts by JPMorgan that projected substantial infrastructure construction in the world’s leading copper consumer. In addition, the Yangshan copper premium, a gauge reflecting buyers’ willingness to pay above London Metals Exchange benchmarks for physical deliveries, reached their highest level since 2022. Longer-term worries about a potential copper shortage were also a driving force, as reports from S&P Global and the EIA forecast a doubling of copper demand by 2035, surpassing the International Copper Association’s prediction of a 26% supply increase. In the short term, Codelco’s output dropped by 14% in the first half of the year, extending a 7% decline from 2022.
US INFLATION BOLSTERS DOLLAR
The US Dollar Index rebounded to the 106 mark on Thursday following reports of higher-than-expected consumer prices in September, coupled with resilient inflation numbers.
The euro slipped below $1.06/€ as investors turned to the dollar in response to the hotter-than-expected US inflation data and expectations of higher rates for longer from the Federal Reserve.
The pound weakened to below $1.23/£ after reaching a three-week high of $1.234/£ on 11 October. Again, this drop was due to investors turning to the US dollar following the release of stronger-than-expected US inflation data.
The pound started the day trading at 1.2181/$ and 1.1567/€.
Sources: WSJ, Reuters/Refinitiv, Trading economics and Investing.com.
Written by Citadel Global Director, Bianca Botes
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