Written by Convera’s Market Insights team
Middle East conflict dents sentiment
The market volatility of the last few trading sessions is most likely to continue going into the new week as US labour market data remains ambiguous at a time when geopolitical tensions are rising, and inflation data is coming up. Investors have switched into risk-off mode in early European trading as they assess the potential market impact of the beginning of the war in the Middle East.
Israeli military forces clashed with gunmen from the Palestinian group Hamas over the weekend and launched rockets into the Hamas controlled Gaza strip. It was a retaliation for a surprise attack on a music festival in the desert in south Israel that killed at least 250 people over the weekend. The current death toll from the conflict on both sides has climbed to 1,100 as the fighting enters the third day. There is a lot of uncertainty in markets this morning. Demand for safe haven assets like gold and bonds has increased over the night in the Asian session but the movement seems to be contained so far. European equities will most likely open the day a bit lower on the back of the rise in oil prices of around 4%.
However, as the situation evolves and new information comes out, investors will adjust their positioning accordingly. The main channel through which the conflict will impact markets will be the commodity one. An already tight oil market going into Q4 is sensitive to news out of the Middle East as tensions between Israel and Iran remain elevated. Brent oil is down around 11% ($85) since the peak reached two weeks ago at $96 a barrel. This has alleviated some pressure from EUR/USD, which has risen for three consecutive days to $1.0550 following the weak ADP jobs report on Wednesday. A later, much stronger, official US jobs report released on Friday, did nothing to dent the euro’s first weekly appreciation since the middle of July.
Boris Kovacevic – Global Macro Strategist
Focus shifts from labour to inflation
The US labor market has once again been the primary focus of investors last week as both job openings and nonfarm payrolls toped all forecasts in the previous month. Vacancies in the US increased from 8.92 million in July to 9.61 million in August with the overall job growth for September coming in at a strong 336 thousand. This was the second largest monthly job creation this year and well above the expectations of 170 thousand. However, the US dollar still struggled to make any new gains last week. Looking under the hood of the reports shows first signs of labour market weakness, leading to a stagnating Greenback.
For one, wage growth is continuing to decelerate. Average hourly earnings for all employees in the US have risen by 4.2% last month from a year ago, the lowest growth since June 2021. And most of the new job openings from August have come from a single industry (professional services), showing that the resilience of the labour market is theory is losing some ground. The alternative ADP report also showed private job growth slowing for the fourth month to just 89 thousand. Combining these data points with the jobs quits rate remaining unchanged at 2.3%, close to pre pandemic levels, shows how the willingness to leave a job has decreased from the highs reached at the beginning of 2022.
Now the attention shifts from jobs to inflation. The bond market will remain closed today due to Columbus day. However, Wednesday will bring the release of US producer price inflation and the Fed minutes, which will be followed by consumer inflation data on Thursday. Investors will continue to watch out for new headlines from the Middle East as well to see if the Greenback’s 6.8% rally from July has legs to stand on. Markets are currently pricing in a 30% chance of another hike from the Fed this year with the first rate cut pencilled in for July 2024.
Boris Kovacevic – Global Macro Strategist
Pound surrenders to safe havens
With the UK’s exposure to energy costs, the British pound has come under selling pressure because of the jump in oil prices, as Hamas’ surprise attack on Israel stoked supply concerns. Meanwhile, safe haven assets including the US dollar, yen and gold are in high demand amid the hit to global risk sentiment.
GBP/USD had climbed for three days straight, almost 2% higher than its 7-month low near $1.20. However, amid the rebound in USD safe haven demand, the currency pair looks poised to slip further south of the $1.22 mark. Against the euro, the pound is inching higher though as the Eurozone is deemed more vulnerable to high energy costs. Global risk sentiment will likely steer trends across financial markets for now, especially as US markets are shut today. Later this week, we have UK GDP for August, though it is unlikely to make much of a difference to the Bank of England’s (BoE) November meeting. Instead, the BoE is looking at services inflation, private-sector wage growth, and the vacancy-to-unemployment ratio as a guide for policy. All three indicators will be released next week.
Looking at FX positioning, we see that speculators flipped to a net GBP short position for the first time since April. The unwind in recent weeks has been huge, and selling momentum is now the strongest in a year, but it also means GBP long liquidation has run its course, which could bode well for sterling and any strong recovery attempts in the future.
George Vessey – Lead FX Strategist
Oil rebounds with safe haven USD and JPY
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 9-13
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
