The unfolding events in the Middle East have captivated the world's attention, leaving news tickers running and hearts heavy. Amid the immeasurable human toll, as this complex situation continues to evolve, it becomes imperative to assess the impact of this escalating conflict on financial markets and the global economy. Our team of research experts offers their insights in this week's Research Weekly.
Conflict in Israel: Over the weekend, conflict erupted in Israel, prompting a shift in financial markets toward a partial risk-off mode.
Global Yields: Global yields experienced a roller coaster ride, ultimately edging higher in a week marked by notable signals from the US labor market.
Chinese Recovery: The recent holiday period in China displayed ongoing signs of recovery, although it appears to be gradually losing momentum.
The relationship between financial markets and economic realities often operates on an unemotional basis, which can draw criticism, particularly when emotional events and striking images dominate the news. Geopolitical strategists suggest that the influence of the recent escalations in the Middle East on the markets may remain limited. However, market movements have already begun as they respond to the potential for escalating tensions that might necessitate the involvement of other parties.
Geopolitics: Eruption in the Middle East Presently, financial markets appear to be adopting a partial risk-off stance. Oil, gold, and the USD are on the rise, while safe-haven government bonds may experience a pause in yield increases. The risk of an escalation of the conflict into regions like Lebanon or Iran looms large, with the extent of any escalation shaping the duration and intensity of the impact on capital markets and the broader economy.
From a commodity perspective, geopolitics tends to introduce temporary noise rather than a lasting and profound fundamental force. Although our experts remain vigilant regarding the current situation, they anticipate that events will follow the typical geopolitical playbook, with any escalation extending the shock's duration and intensity. Beyond the Middle East, global factors such as US interest rates and the dynamic geopolitical landscape continue to influence Chinese stocks in the near term.
Impact on Asset Classes
Gold: Gold prices have seen some gains, yet the reaction remains relatively subdued. A strong economy and reduced banking stress limit demand for this safe haven.
Rates: Safe-haven government bonds have seen an uptick in trading, but these gains haven't offset last week's declines.
USD: Market reactions have been relatively moderate, with the EUR/USD still trading around 1.05. An increase in risk aversion could boost the USD, possibly aligning with our three-month target of 1.04.
Equities: Except for the oil & gas sector, global equity markets have displayed muted reactions. Barring further escalation, the recent events are unlikely to derail the anticipated year-end rally.
China's Recovery: While China's National Day 'golden week' holiday traditionally sparks robust domestic and outbound travel, this year's travel activity provides a gauge of consumption recovery following the reopening of the Chinese economy. Domestic travel during the eight-day holiday reached 826 million trips, with tourism revenue exceeding pre-pandemic levels by 4.1%. However, there are signs that the recovery in travel activity is beginning to lose momentum, consistent with recent service sector survey data, indicating a slowdown in the recovery's pace following the initial post-reopening surge.
Global Yields: Bond investors have navigated a turbulent start to the new quarter, primarily driven by signals from the resilient US labor market. Despite lower-than-expected wage growth, yields are once again on the rise, with the 10-year US Treasury yield hovering around 4.8%. Upcoming data, including the US consumer price index and Federal Open Market Committee meeting minutes, will provide additional insights into the volatile yield environment. The current dynamics are primarily explained by shifts in real yields, while inflation expectations remain relatively stable.
What It Means for Investors: As concerns about the Middle East conflict persist, some initial market reactions have already reversed. A cautious "wait and see" approach is advisable. For those who engage in market timing, building positions in stocks over the next few trading sessions is an option, bearing in mind that navigating market bottoms can be a turbulent experience. Cash-rich investors may also use the prevailing "doom and gloom" sentiment to realign with their benchmarks.
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