Stocks rose and bonds fell yesterday in response to efforts by the US and its allies to ease tensions in the Middle East. Yet Israel warned the US of a “protracted war”. We understand that no matter how serious the situation in the Middle East is, the way markets interpret news will gradually deteriorate, leading to a decline in the value of risk assets such as gold and the Swiss franc.
But at this point it is still premature to let down the alarm because Israel has yet to have its last word. The risk of an Israeli attack is high, and there is a strong possibility of a sharp decline in interest if diplomatic efforts fail.
From a price perspective, gold is just below its 200-day moving average (DMA), which means it could quickly rise to $2,000 an ounce if bad news comes out of the Middle East. The yield on US 10-year Treasury bonds could soon rise to 4.50%, and oil prices could rise. Yesterday, oil prices fell due to general market relief. News that the U.S. and Venezuela plan to resume talks helped with the strong prospect of the Biden administration easing sanctions on Venezuelan oil. But there are upside risks. Iran’s intervention in tensions could push the price of oil above $100 a barrel.
As China sided with the Palestinians in the conflict, the situation in Gaza did not help improve US-China relations. Therefore, it is not surprising that the US is considering restrictions on China’s access to advanced semiconductors or machinery that makes advanced semiconductors. Nvidia rose yesterday despite the news, but the chipmaker’s shares are vulnerable not only to an escalating “chip war” between the US and China, but also to tensions in Israel, Israel’s key role in advanced chip production. could further disrupt the global chip supply chain.
Looking at the data: Strong U.S. retail sales will boost demand if Fed rate hike expectations remain in check.
A return to low-risk assets may boost demand for US Treasuries in the short term, but the fate of US bonds will depend on economic data and what the Federal Reserve (Fed) will or won’t do at upcoming meetings. Structure of its own fight against inflation. It is clear that further escalation of tensions in Gaza and sustained positive pressure on oil prices could raise inflation expectations and push for rate hikes later in the year. However, further escalation is not the baseline scenario for now.
On the data front, the Empire State Manufacturing Index showed a slower-than-expected contraction in October, and retail sales data for September is out today. This number may be strong as September is a good month for spending when kids go back to school. The strong data will fuel confidence as Fed spokesmen continue to point to an end to monetary policy tightening.
Note that strong US spending is a key factor in explaining why the US economy is so resilient to the Fed’s aggressive policies. But behind the scenes we see important vulnerabilities. Unlike some European countries, including Germany, France and the United Kingdom, US savings have suffered the sharpest decline to pre-pandemic levels, IMF data shows. Because money is scarce, spending should slow and help the central bank keep track of inflation toward its 2% target.