Summary: Crude oil prices surged over 4% due to Middle East concerns, yet Brent remains below $90 with no immediate supply threat. Contagion risks loom, and Suez Canal disruptions could further boost energy markets. US equity markets rallied, led by energy and defense stocks. The dollar's bid waned, indicating a USD uptrend exhaustion as Fed speakers turned dovish due to financial conditions tightening from higher bond yields. The conflict spurred safe-haven demand for gold and Treasuries. The 10-year US Treasury yield dropped 16bps to 4.64% this morning in Asia when the cash market resumed trading.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: Markets continued to rally, driven by energy and defence stocks amid the escalation of the conflicts in the Middle East. The energy sector of the S&P500 surged 3.5%, followed by industrials at 1.6%. Northrop Grumman soared 11.4%, while Lockheed Martin gained 9%. In his latest Macro Digest: Middle East in Focus, Saxo CIO Steen Jakobsen reiterated our equity calls to be overweight in energy, defence stocks, cybersecurity, infrastructure and semiconductors.
Fixed income: The Israel-Hamas conflict stirred a safe-haven bid for Treasury futures as the cash market was closed for the Columbus Day holiday. Fed officials' concerns about recent surges in the risk premium in the bond market also contributed to the buying. The 10-year T-notes futures jumped by a full point on Monday. When the Treasury cash market opened this morning in Tokyo, the 2-year yield and the 10-year yield were 14bps and 16bps lower, at 4.94% and 4.64%, respectively.
China/HK Equities: Major Hong Kong indices edged up modestly in a typhoon-shorted trading day, with the Hang Seng Index bouncing 0.2%. Oil stocks were among the top gainers following a surge in crude oil prices. Materials and healthcare stocks also outperformed. Southbound flows showed net buying of HKD2 billion from mainland investors. The CSI300 slid 0.1% on its first day of trading after the Golden Week.
FX: The safety bid for the dollar remained short-lived, suggesting exhaustion of the upside trend in the USD as Fed speakers also start to turn dovish as they take into account the financial tightening as a result of the higher bond yields. NOK led the gains due to the surge in oil prices, and USDNOK sliding below 10.8. Risk sensitive currencies NZD and AUD also recovered as equities gained. NZDUSD rose back above 0.60 to MTD highs and AUDUSD found support at 0.6350 and rose back above 0.64 handle. Yen found a bid with cash Treasuries closed, and USDJPY slid below 148.50 and risk sensitive EURCHF also below 0.9580 despite EURUSD back higher to test 1.0580.
Commodities: Crude oil prices surges over 4% to start the week amid geopolitical worries in the Middle East region, but Brent remains below $90 with no immediate threat to supplies. But contagion risks are significant, and even threat of disruption in the Suez Canal can bring further upside pressures in oil and energy markets. European gas prices rose 15% as Israel asked Chevron to shut its plant because of safety concerns. Gold prices also gained amid safe haven demand
Macro: Dallas Fed President Logan (voter) – usually a hawk – said that higher long-term rates mean less need for rate hikes. Fed vice-Chair Jefferson said that the Fed is “in a position to proceed carefully in assessing the extent of any additional policy firming that may be necessary”. He said he will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind when assessing the future path of policy.
Macro events: IMF World Economic Outlook; US NFIB survey (Sep) exp 91.0 vs. 91.3 prior. Fed’s Perli, Bostic, Waller, Kashkari, and ECB’s Villeroy speak.
In the news:
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Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
