Hamas' surprise (terrorist) attack on Israel has stoked fears of an escalation of the conflict in the Middle East. The deterioration in risk sentiment is weighing on traditionally risky assets such as equities, and investors are fleeing into gold, bonds and safe haven currencies such as the USD.
This had a particularly strong impact on oil and natural gas prices, which have recently sold off sharply. Crude oil prices jumped about 4% to $86 per barrel (WTI), boosting energy stocks. Natural gas prices also rose, especially in Europe. Israel ordered Chevron to halt production at the Tamar platform due to safety concerns, causing European gas prices to rise by 11%.
Even without the Israel-Hamas conflict, institutional investors' risk appetite was already influenced by high levels of risk aversion, stemming from concerns about the impact of higher interest rates and increasing signs of a further slowdown in economic activity. The conflict in the Middle East will now worsen this already shaky risk sentiment and create more uncertainty – in particular, concerns about higher oil prices could continue the sell-off in September.
Normally, we would have seen a slow start to the week with some markets closed for holidays (e.g. Japan, Korea, Canada) and some in the U.S. (bond markets remain closed) and a quiet economic calendar and no major earnings reports. Instead, we are likely to see more profit taking, especially after Friday's rally that was not supported by fundamentals – on the contrary, an overall strong U.S. labor market increases the likelihood of further Fed tightening. The S&P 500 VIX, which measures volatility, rose sharply today, increasing the risk of a panic sell-off.
Chinese markets also closed lower today, offering no support to markets in Europe and the US after returning from the vacations.
We also expect USD strength to return. The JPY and CHF temporarily gained on safe haven demand, which is unlikely to last long due to the (rather) loose monetary policy of the BoJ and SNB. We see headwinds on EUR, GBP, AUD and all other assets influenced negatively by a worsening risk sentiment.
👁 ROB'S MARKET OVERVIEW:
October 09, 2023
🇺🇸 US Markets ↘️ (selloff to return; Already shaky sentiment further weakened from Hamas-Israel conflict)
Cyclical Stocks ↘️
Tech/Growth Stocks ↘️
Financial Stocks ↘️
Defensive Stocks ➡️/↘️
Energy Stocks ↗️
Materials Stocks ↘️
USD, CAD ↗️
JPY, CHF ↗️/➡️ (Strong early safe haven gains, than stabilizing)
AUD, EUR, GBP ↘️
⚒ Commodity Markets ↗️
Oil prices ↗️
Natural Gas prices ↗️
Metal prices ↕️/↘️ (stronger USD to weigh on commodity prices)
Gold ↗️/➡️ (strong gains on safe haven demand; gains limited on high yields)
⚡️Cryptos ↘️ (poor risk sentiment, strong USD, cryptos remain unattractive)
(*↗️ bullish, ↘️ bearish, ➡️ sideways / stable, ↕️ mixed / volatile)