Market Report.
📦 As we warned in the previous report, strikes at US ports could end up affecting warehousing and transportation costs, triggering inflation again. US bonds are starting to turn around. Yields are rising, discounting this scenario. The US 10 year bond is up 20 bp this week.
🛢️ Likewise, the war between Israel and Iran has a high risk of disrupting crude oil export supplies, or attacking refineries or depots, which could cause oil prices to rise, leading to inflation in the medium term.
📈 Warning signals about inflation and corporate pricing power were indicated in six out of ten Federal Reserve bank reports. For instance, Philadelphia manufacturers reported that prices paid increased to their highest level since December 2022, and nearly all of them indicated no respite from inflation.
📊 Europe’s services PMIs are improving and are at expansionary levels, with the exception of France, which, despite a better than expected level, is still below 50.
🇩🇪 In Germany, the HCOB final services Purchasing Managers’ Index dropped from 51.2 in August to 50.6 now. As declining demand and recession worries created a bleak image for Europe’s largest economy, growth in Germany’s services sector declined for a fourth consecutive month in September, almost coming to a halt, according to a poll. From 48.4 in August to 47.5 in September, the composite PMI index—which includes manufacturing and services—saw a decline.
🇫🇷 French PM Barnier announced €60B in spending cuts and tax hikes for 2023 to reduce budget deficit from ~6.1% to 5% of GDP and boost investor confidence. €20B will come from tax increases on wealthy individuals, large companies, and green taxes in a departure from Macron’s previous pro-business stance. Move contrasts with last 7 years of avoiding tax increases but Macron has lost majority and finances have deteriorated sharply. Investors have dumped French assets, pushing risk premium on debt vs German bunds near euro crisis high due to political instability and fiscal uncertainty.
🇯🇵 In Japan, Factory owner worries rate hikes and stronger yen will hurt export-focused customers with little room for wage/price rises. A BOJ survey shows local business sentiment lagging national recovery, reflecting rural areas like Makinohara are declining tea industry. This areas aren’t sharing in broader recovery or feeling wage/demand increases underpinning BOJ’s policy shift. New PM calls for protecting rural areas as BOJ is expected to raise rates again, against his view Japan isn’t ready. BoJ Governor Ueda is originally from one of these rural towns.
Market View:
📉 The Chinese stock markets are falling back after almost a month of gains. The HSI rose more than 30% in less than a month until this morning’s falls, where it lost 4.5%.
📊 In the US, futures are still struggling to regain pre-Iranian attack levels, cautiously awaiting tomorrow’s employment data. Mini S&P 500 futures are trading at 5740 points, and the Nasdaq 100 also remains weak at 19735 points, down more than 600 points from its September levels.
💵 The dollar index continues a strong rise since the end of September and is trading at 102 points, currently trading at 101.90. The EUR/USD continues to weaken and has lost 1.1050 in recent hours, currently trading at 1.1035.
🛢️ Crude oil, whose Brent barrel rose above $76 after the Iranian attack, only to fall back below $74 hours later, is strengthening again and is currently trading at $75.35. Possibly due to fears that Israel may damage Iran’s oil infrastructure in retaliation. Gold remains calm, currently trading at $2665, with a clear base at $2650 and resistance in the $2700 area. Bitcoin continues to retreat from last week’s high of $66,000 to $60,750 at the moment.
Geopolitics:
🌍 Israel bombed central Beirut early today, killing at least six people, after suffering their deadliest day against Hezbollah with eight soldiers killed. G7 leaders voiced “strong concern” over the crisis but said diplomacy was still possible, while China called for urgent UN Security Council action to de-escalate tensions. Over 1,900 people have been killed in Lebanon in the clashes, with most in the past two weeks, and around 1.2 million Lebanese have been displaced. Israel declared UN Secretary-General Antonio Guterres persona non grata for not unequivocally condemning Iran’s missile attack on Israel. Iran described its missile assault as a response to Israeli killings of militant leaders and attacks in Lebanon. According to local reporters, evacuations of wounded Israeli soldiers reportedly took place yesterday after the first incursions into Lebanon, in a clear reminder of the casualties suffered years ago when they tried to incursion into this territory.
⛽ Russia may ban exports of vital resources like natural gas, oil, grains and fertilizers to Western nations in response to their economic sanctions and hostility. Such a move would deal a major blow to European economies heavily reliant on Russian energy imports during the current crisis. Countries like Germany and Italy are especially vulnerable. Russia is a top global exporter of oil, natural gas, wheat and fertilizers. A halt in shipments could severely impact food and energy markets, driving up prices and shortages. The Kremlin has so far refrained from using its leverage over European energy dependence but warned sanctions may force its hand, saying the West is shooting itself in the foot. An export ban would mark a major escalation in Russia’s economic warfare with the West. It could aim to break the unity of sanctions and push Europe to pressure Washington into negotiations. However, Russia would also lose significant export revenues. The impact on its own economy and ability to fund military operations is uncertain.
