The situation in the Middle East has a negative impact on market sentiment

October 24, 2023

American stock indices traded yesterday without any unified dynamics. At Monday’s close, the Dow Jones Index (US30) decreased by 0.58%, while the S&P 500 Index (US500) was down by 0.17%. The NASDAQ Technology Index (US100) closed positive by 0.27%. The decline in T bond yields on Monday was bearish for the US dollar and bullish for stock indices. The dollar on Monday initially found support in the jump in the 10-year bond yield to a new 16-year high, but then bond yields reversed and headed lower. From a fundamental perspective, the tightening of financial conditions in the US is certainly reducing the need for further monetary tightening, and many US Fed officials have moved to a less hawkish tone. Markets are currently pricing in just a 2% chance that the FOMC will raise the lending rate by 25 bps at its next meeting, which ends on November 1, and a 23% chance that the rate will be raised by 25 bps at its December 13 meeting.

The fear that the war between Israel and Hamas could escalate into a regional conflict is weighing on market sentiment. Western countries stepped up efforts to prevent the war between Israel and Hamas from escalating, and EU leaders supported the UN’s call for a “humanitarian pause” in the war. President Biden held talks with the presidents of Canada, France, Germany, and Italy to strengthen coordination among the allies. At the same time, late yesterday, there was news of explosions at three US military bases in the Middle East. This news interrupted Biden’s live-streamed remarks. Intelligence reports indicate that Iranian-backed militias are poised to step up attacks on US troops in the Middle East. Israel has said it supports diplomatic efforts to get Hamas to release hostages from Gaza, which could delay a possible ground invasion, but is not going to wait long to launch a ground offensive. Iran and its proxy forces in Lebanon, Iraq, and Yemen have warned they could retaliate against Israel if Israeli troops enter Gaza.

Equity markets in Europe traded flat yesterday. Germany’s DAX (DE40) rose by 0.02%, France’s CAC 40 (FR40) added 0.50% on Monday, Spain’s IBEX 35 (ES35) decreased by 0.37%, and the UK’s FTSE 100 (UK100) closed negative by 0.37%.

British consumers are curbing their spending ahead of the festive season, and the latest survey from Gfk suggests that the weather is not the only reason for this. Retail sales fell by 0.9% in September, well above expectations of a 0.3% decline. The Gfk Consumer Confidence Index fell back to 30. The outlook for the British economy remains bleak as growth is sluggish, and recent economic indicators point to a slowdown in manufacturing activity, while UK inflation remains stubbornly high.

The potential for an escalation of the conflict between Israel and Hamas and poor corporate earnings have left investors looking for safe havens, of which there are few left. The US dollar is not in the best position at the moment, as the US Federal Reserve does not plan to continue its tightening policy in the near future. According to economists, apart from the US dollar, only gold and the Swiss franc remain as safe havens. The Swiss franc is a longtime safe haven asset that recently hit its highest level against the euro since 2015 and has held up against the losses of its traditional peers.

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Last Wednesday, the US said it would ease sanctions on Venezuela’s oil exports for six months in exchange for measures to ensure the country holds fair presidential elections next year. The easing of sanctions will bring additional oil supplies to the global market, which some analysts estimate will be about 200,000 barrels per day. However, oil traders believe that tension in the oil market will still remain due to the extension of the OPEC+ agreement on production cuts.

Asian markets were mostly declining yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.83%, China’s FTSE China A50 (CHA50) was down by 0.62%, Hong Kong’s Hang Seng (HK50) lost 0.72% on the day, and Australia’s ASX 200 (AU200) was negative by 0.82% on Monday. On Tuesday, most Asian stocks extended losses after weak business activity data in Japan and Australia. At the same time, Chinese markets rebounded from pre-pandemic lows thanks to a government fund starting to buy some stocks.

Japanese government bond (JGB) yields rose to new multi-year highs on Monday as investors assess the likelihood that the Bank of Japan will continue to adjust its yield curve control (YCC) policy next week. One possibility being discussed is an increase in the 1% ceiling for the 10-year yield.

S&P 500 (F)(US500) 4,217.04 −7.12 (−0.17%)

Dow Jones (US30) 32,936.41 −190.87 (−0.58%)

DAX (DE40) 14,800.72 +2.25 (+0.015%)

FTSE 100 (UK100) 7,374.83 −27.31 (−0.37%)

USD Index 105.62 −0.54 (−0.51%)

News feed for 2023.10.24:

– Australia Manufacturing PMI (m/m) at 01:00 (GMT+3);
– Australia Services PMI (m/m) at 01:00 (GMT+3);
– Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
– Japan Services PMI (m/m) at 03:30 (GMT+3);
– UK Unemployment Rate (m/m) at 09:00 (GMT+3);
– German Manufacturing PMI (m/m) at 10:30 (GMT+3);
– German Services PMI (m/m) at 10:30 (GMT+3);
– Australia RBA Gov Bullock Speaks at 11:00 (GMT+3);
– Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
– Eurozone Services PMI (m/m) at 11:00 (GMT+3);
– UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
– UK Services PMI (m/m) at 11:30 (GMT+3);
– Eurozone ECB President Lagarde Speaks at 15:30 (GMT+3);
– US Manufacturing PMI (m/m) at 16:45 (GMT+3);
– US Services PMI (m/m) at 16:45 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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The situation in the Middle East has a negative impact on market sentiment