Global financial markets experienced a wave of uncertainty as geopolitical tensions in the Middle East led to a surge in oil and gold prices, causing concerns among investors. While global shares showed relative stability on Wednesday, apprehensions about the risk of an escalating Middle East conflict contributed to gains in both oil and gold prices.
Adding to the unease was the anticipation of ongoing high-interest rates, stemming from recent U.S. data that revealed an uptick in consumer spending in September. The news sent shockwaves through the bond markets, which had already been under duress. U.S. retail sales outperformed expectations in the prior month, reinforcing expectations of stronger-than-expected economic growth in the third quarter.
On the international front, China reported a 4.9% annual growth in the third quarter, surpassing forecasts that had predicted 4.4%. Additional reports from China indicated a resilient consumer base, implying that Beijing’s stimulus efforts might be delivering results.
Nevertheless, investor sentiment remained fragile, as Israeli and Palestinian authorities exchanged accusations regarding an explosion that claimed hundreds of lives at a Gaza hospital. These events added complexity to U.S. President Joe Biden’s already delicate trip to the region.
Despite the rise in oil prices above $90 per barrel and an increased demand for gold, it was clear that the primary driving force for the markets on Wednesday remained the outlook for interest rates and inflation. Samy Chaar, Chief Economist at Lombard Odier, highlighted the significance of inflation and its implications for central banks, alongside the notion of U.S. exceptionalism maintaining the potential to influence the Federal Reserve’s future decisions.
Chaar noted, “The dominant force remains this reality of inflation and what it means for central banks and how U.S. exceptionalism keeps alive the risk of upsetting the Fed down the road.” He further observed that despite the usual trend of declining bond yields during geopolitical stress, yields had instead surged.
Investor expectations leaned toward the likelihood of the Federal Reserve being compelled to raise interest rates again, despite previous signals suggesting it may not be necessary. While the probability of a rate hike in November remained low at 11%, the likelihood for January increased to 50% from 37%.
Additionally, the market adjusted its expectations regarding early rate cuts, now projecting no movement until June and implying approximately 54 basis points of easing throughout 2024.
Market Retreat and Tech Stock Gloom
Stock markets experienced a downturn on Wednesday, with the MSCI All-World index edging down 0.1%. In Europe, the STOXX 600 fell 0.2%, and the tech sector, susceptible to interest rate hikes, faced pressure. Tuesday’s news of the Biden administration’s plans to halt shipments to China of advanced artificial intelligence chips weighed on tech shares, particularly Nvidia (NASDAQ:NVDA).
Dutch semiconductor manufacturer ASML faced a 1.1% decline on the European market, having issued a warning about flat sales in 2024. Market participants eagerly awaited earnings reports from Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) later in the day.
Government bonds attempted to recover from their previous losses, with yields on the two-year Treasury note down 2 bps at 5.193%. Ten-year yields remained flat at 4.851%, following an 11 bps increase the day before.
In Japan, the Bank of Japan conducted an unscheduled operation to purchase JGBs in an attempt to curb rising yields. Meanwhile, German 10-year yields in the euro zone increased for a third consecutive day, rising by 2.5 bps to 2.907%.
More statements from Federal Reserve officials were expected on Wednesday, with five officials scheduled to speak before Chair Jerome Powell’s appearance on Thursday. Jefferies strategist Mohit Kumar commented on the current market environment, emphasizing the significance of news that may influence the Federal Reserve.
“We are in an environment where bad news is good news and good news depends on whether it’s good enough to push the Fed,” Kumar said. He added that modestly long positions in risky assets were being maintained, but they were being approached with caution due to the ongoing geopolitical uncertainty.
Amidst rising yields, the U.S. dollar remained relatively steady against a basket of currencies. Gold prices increased by 0.8% to $1,938.39 per ounce, surpassing its recent low of $1,809. Meanwhile, oil prices reached two-week highs, driven by mounting concerns over Middle East tensions and data indicating a decline in crude stocks.
Brent crude rose by 2% to $91.77 per barrel, and U.S. crude followed suit, increasing by 2.3% to $88.59 per barrel.