Can tensions around the Strait of Hormuz cool down?
Global markets saw major swings this week as weak U.S. jobs data sharply reduced expectations for near-term Federal Reserve rate hikes. In equities, U.S. indexes finished mixed, with the Dow down 1.26% for the week, the Nasdaq up 0.45% and the S&P 500 down 0.27%. European stocks fell across the board, as the UK FTSE 100 dropped 2.18% for the week, Germany's DAX 30 slipped 0.70% and France's CAC 40 declined 2.24%.
A busy week lies ahead, with markets focused on the Federal Reserve's meeting minutes. Softer U.S. employment data has weakened the case for another rate increase this month, and investors will use the minutes to gauge the timing of the Fed's next move. Concerns over France's fiscal and political difficulties have widened the spread on French government bonds, while the euro area's latest economic data will draw close attention. At the same time, markets will keep watching the global bond selloff and swings in energy prices, as Middle East conflict is raising the risk of higher global prices.
Fed decision looms
The minutes of the Fed's September policy meeting will be released next Wednesday (the 7th). At that meeting, the Fed raised rates out of concern over high energy prices. With recent U.S. jobs data falling well short of expectations, market expectations for a follow-up hike on October 28 have cooled, and investors will look to the minutes for clues on the timing of the next increase. LSEG data showed that on Friday, U.S. money markets priced only an 18% chance of an October hike, compared with as high as 70% just days earlier. Current market pricing implies at least three hikes over the next 12 months. Analysts at ING believe December remains the most likely time for a hike and that market pricing for further increases is too aggressive.
Investors will also parse a series of economic reports, and any signs of weakness could further dampen the rate outlook: these include the September ISM services PMI, August trade data, weekly initial jobless claims and the preliminary University of Michigan October consumer sentiment reading. Recently, yields on 10-year and 30-year U.S. Treasuries have surged to multi-year highs, and Treasury market moves will remain closely tracked. With a new earnings season approaching, PepsiCo, Delta Air Lines and Constellation Brands are among companies due to report next week.
Crude oil and gold
Helped by improved expectations for Middle East oil supply and news that the Group of Seven plans to release large volumes of diesel and crude from reserves to tame record-high prices, international oil prices plunged late in the session. The front-month WTI contract fell 1.41% for the week to $91.11 a barrel, while front-month Brent rose 4.94% for the week to $102.25 a barrel. On Friday, the G7 announced plans to release 100 million barrels of oil products from diesel and crude reserves over the next four months. In its statement, the G7 encouraged countries with strong refining capacity to boost output and said member states would coordinate refinery maintenance schedules to avoid simultaneous shutdowns and, where feasible, temporarily raise utilization rates. At the same time, the latest news of stronger-than-expected Middle East oil shipments also weighed on prices, even though the future course of the regional conflict remains uncertain. Earlier in the week, the United States was sending a third aircraft carrier to the region, and market fears that the conflict could escalate briefly pushed oil prices higher. Analysts at MUFG said that with global inventories declining, spot North Sea crude prices remain elevated. The OPEC+ monitoring committee will meet on the 4th local time and is likely to keep existing production policy unchanged given continued uncertainty over the safety of Middle East oil supply flows. Constraints in refined products markets are especially pronounced. Middle East diesel exports are only 25% of pre-conflict levels, and Russian diesel exports have fallen to 20% of May levels.
Precious metals fell sharply, with COMEX gold futures for October delivery down 3.59% for the week at $4,133.70 an ounce and COMEX silver down 6.68% at $59.97 an ounce. The weak nonfarm payrolls report lowered the odds of an October Fed hike, which is positive for gold, but the market recognizes that upside inflation risks from costlier diesel have not disappeared, and a rebound in long-term Treasury yields pressured non-yielding precious metals. Safe-haven buying tied to geopolitical conflict provided only brief support, while profit-taking by bulls was strong. Goldman Sachs expects wide-ranging volatility next week and remains cautiously bullish but does not advise chasing highs. If next week's services PMI and University of Michigan inflation expectations come in stronger and Treasury yields rebound, gold prices will come under pressure again. JPMorgan believes gold has entered a data-driven period of high volatility. Its base case is a pause in October and a hike in December, with real rates fluctuating at high levels and gold trading in a range. If Michigan consumer inflation expectations rise and long-term bond yields rebound, gold could test around $4,080 an ounce; if inflation expectations ease, gold could rebound to test $4,250 an ounce.
French debt concerns escalate
The minutes of the European Central Bank's September policy meeting will be released next Thursday (the 8th). The ECB raised rates at that meeting, and investors will look to the minutes for clues on the next hike. Recent euro area inflation data show that high energy prices are feeding through to other parts of the economy. LSEG data show that markets price a 26% chance of a 25 basis point hike on October 29 and at most three hikes over the next 12 months. France's latest draft budget has triggered fiscal and political concerns, pushing the yield on 10-year French government bonds to its highest level since 2002 and sharply widening the yield spread between French and German government debt. Economists at Investec said in a report: "We believe bond market nervousness will persist in the near term." Against a backdrop of bond market anxiety, euro area economic data will be closely watched next week, including final September services PMIs for France, Germany and the euro area, euro area August retail sales, German August manufacturing orders and French August industrial output.
UK Prime Minister Andy Burnham delivered a keynote speech at this week's Labour Party conference, proposing large-scale structural reforms to reshape public services and revisit Brexit. He plans to hold a UK-EU summit in November to fully assess various options, among which rejoining the bloc is a long-term option and not a short-term goal of this government. Chancellor John Healey pledged to strictly adhere to fiscal discipline and not breach fiscal rules, and will publish his first budget on October 28. Next week's UK data calendar is relatively light, with the only major release being the final September services PMI.
What to watch next week
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