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October will be remembered for an unexpected attack by Hamas militant group on Israel in the early morning of October 7, which started Israel-Hamas war. Markets reacted unevenly – major equity indexes barely moved, gold prices started their significant climb, while yields on U.S. Treasuries and German Bunds dropped by 10-30 basis points, depending on maturity. The greatest movement was in the longer maturity bonds, as yield on the 10-year Treasuries dropped to 4.55%. However, as soon as Israel stabilized the situation, yields hastened to return to their pre-war levels.
Oil prices fluctuate amid war tensions
The beginning of hostilities caused concern in the oil market: in the period from October 6 to 13, the prices of Light Sweet Crude rose by 5.92% and Brent Crude by 7.46%. Market participants were frightened by the repetition of the consequences of The Yom Kippur War, when the OPEC member countries declared an oil embargo on the West. Against the backdrop of events in Israel, the United States decided to lessen sanctions against the oil and gas and gold mining sectors of Venezuela. Still, experts note that the relieving of sanctions will not have an immediate effect; however, in the long run, such a step from the United States is positive for containing potential price pressure in the energy market. In all, oil had a rather weak month, unable to put any pressure on the 100 dollars per barrel mark. Now we need to see if prices will stay in recent ranges of USD/bbl. 80-95 to gather steam for a meaningful move higher. Natural gas on the other hand did not let us down and pushed significantly higher, and we reiterate our view that it is worth having some long exposure in this asset.
European and US equity markets
Central banks appear to be done with rate hikes
During their October meetings both the ECB and the Fed decided to leave interest rates unchanged, and that perfectly matched market expectations. The Fed noted that growing yields on longer-term Treasuries will have the necessary restraining effect on the further economic growth, which in the medium-term perspective should curb inflation and return it to Fed’s 2% target level, with the ECB stating basically the same. In a word, the rhetoric of the central banks is clear – they did what they could and wanted to do and now what remains is to observe economic data and adjust the monetary policy accordingly, while also hoping for a certain adequacy of the fiscal authorities and their debt appetites. The market does not expect any further rate hikes from the ECB and the Fed, hoping for a decrease in rates in the near future.
Yield curves of German and U.S. government bonds have become almost perfectly flat – yields on 2-year bonds are almost equal to those of 30-year securities (a slight subsidence is observed in 5- and 10-year bonds). What does this tell us? Essentially, the market believes that central banks have finally returned to “normal” (or “old”) levels of interest rates, i.e. the time of ultra-soft monetary policy is slowly becoming history. Moreover, according to the market, the possible onset of a recession may cause a rate cut of 150-200 basis points, but no more.
We still believe that buying 10-year U.S. Treasuries at yield levels above 4.5% is an attractive and justified investment. We do not rule out the possibility of yields on 10-year debt testing and reaching 5-5.25% (leaving aside the possibility of hyperinflation), but we do not believe that such an event will have a lasting effect.
Gold price, USD/oz
Gold approaches the all-important XAU/USD 2000 mark
After rather cruel (for PM markets) September, we saw gold prices gaining momentum and once again poking that fat round number of 2000 dollars per troy ounce. We keep our fingers crossed, but are also mindful of an important resistance level of XAU/USD 2050, which so far kept a lid on all attempts to break higher. On the other hand, the market approaches this resistance for the fourth time and that increases probabilities for the long-awaited breakout.
After impressive two month of gains for the U.S. dollar, we somewhat expected this run to continue in October as well, but instead U.S. currency looked rather apathetic. We watch closely EUR/USD levels of 1.0450 and 1.0720 for further trading signals.
Benchmark 10-year bond yields
Things are not getting better in major economies
Contraction in U.S. manufacturing sector continued to gain pace. The Institute for Supply Management’s purchasing managers’ index, which gauges factory activity in the largest global economy, registered a reading of 46.7, down from September’s 49.0. Furthermore, job growth in the United States slowed significantly, with highly-watched nonfarm payrolls report from the Bureau of Labor Statistics revealing that employers added 150,000 jobs during the month. This figure was a notable decrease from the already negatively revised September count of 297,000. The unemployment rate also inched up to 3.9% in October, compared to 3.8% in the preceding month.
China’s Caixin services PMI registered a slight increase in the reading in October, and this slow level of growth might be primarily attributed to a deepening decline in domestic demand, which largely counteracted some improvements in foreign orders. Of course, this made companies more cautious regarding their possible expansion in operations. Additionally, China’s manufacturing sector unexpectedly contracted in October, as evidenced by the Caixin/S&P Global manufacturing PMI, which declined by a point to 49.5 in October, marking its first contraction since July.
Manufacturing activity in the Eurozone experienced another notable setback, with orders contracting at one of the sharpest rates since data collection began in 1997. Final Purchasing Managers’ Index for the Eurozone manufacturing, compiled by the S&P Global, dropped to 43.1 in October, down from September’s already pessimistic 43.4. New orders faced a further decline for the 18th consecutive month, with index slipping to 39.0 from 39.2. Despite factories reducing their prices again in October, demand continued to weaken. Inflation in the Eurozone is also rapidly declining, with prices only rising by 2.9% in October (slowest pace since July 2021), according to the preliminary Eurostat report.
High Yield bond Indexes
Source: Bloomberg and Signet Bank
The stock market is at a crossroads
At the time of writing, 81% of the companies in the S&P 500 have published their Q3 results. So far, earnings per share have been better than expected for 82% of the companies that have reported, which is above the 5- and 10-year averages. Meanwhile, high interest rates and falling oil prices in October contributed to a 2.2% decline in the index. The biggest drop was in oil and gas stocks (-6.08%), while defense stocks were expectedly in demand (up 5 to 14%).
The support level of S&P 500 was tested at the very end of the month, and what we see at the moment (growth of the index to 4380 points), we perceive as a correction within the downtrend. The resistance zone of 4400-4475 points is almost reached, and its overcoming will seriously increase the bulls’ chances of reaching maximums of December 2021. For now, we recommend not to get ahead of yourself and refrain from opening long positions, focusing on more interesting opportunities in other asset classes.