All eyes are on the Middle East this week. Equities finished the week flat due to the concerns about the Israel-Hamas conflicts. Concerns over a potential government shutdown will be reignited as the extension will expire next month. Earning season kickstarted this Friday, starting with some financial stocks.
Geopolitical Risks: The latest geopolitical events are favorable to the outlook on government bonds in developed markets. Energy and defense sector stocks are expected to outperform when the conflicts escalate. Gold is also attractive to investors in a risky geopolitical environment with its track record.
Treasury Auction: The demand for treasury bond auction is weak, mainly driven by the concerns around the increasing federal deficit. Dealer is taking up the supply of 30Y bonds more than usual (18% actual vs 11% average). Long-term yields are still staying above the fair value expected by the economist.
Oil Spike: Oil prices jumped due to the war. Investors expect that it could destabilize the Middle East and affect the global supply. The likelihood of a Saudi production boost is lower, and the concerns about the downside risks to Iranian oil production are increasing. WTI and Brent went up 5.7% and 7.2% this week respectively.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Earning season started this week with some financial names beating expectations significantly, mainly driven by the high net interest income. A basket of bank stocks went up 2%.
HSBC: US equities remain strong as FOMC minutes reinforced the end of the hiking cycle. Stocks dropped slightly after the release of US CPI data, which the headline CPI print is higher than expected.
Goldman Sachs: The softer tone of the Fed’s officials led the markets to lower the expectations for another hike by the end of the year from 55% to 40%. They mentioned that higher yields may offset a future hike as it could help with cooling the economy.
UBS: We expect the treasury demand will catch up with the increasing supply. Although the higher supply puts upward pressure on yields, we believe the demand will meet the additional supply ultimately as the Fed has the ability to step in as a buyer if needed in order to maintain market stability.
UBS: There are uncertainty and geopolitical tensions between different places, including Israel-Hamas, Ukraine-Russia and US-China. Precious metal like gold is attractive and recommended for adding to the portfolio to diversify the risks as gold could act as a safe-haven. The expectation of the end of the hiking cycle is also favorable to gold as the opportunity cost of holding non-interest bearing assets is lower.
Blackrock: We expect a higher macro and market volatility. Markets are pricing in higher interest rates and lower long-term growth, mainly driven by geopolitical tensions, rewiring supply chain and aging constraints of labor force.
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