Equities were down this week as the tension in the Middle East escalated. Investors are looking for protection from the downside risks, causing an increase in option prices. Volatility index (VIX) rose about 9%. Fed officials suggested holding rates, which the market is pricing 6% and 36% likelihood of rate hike on November and December meetings respectively.
Haven Assets: As the concerns of the conflict between Israel and Hamas are rising, investors increase their allocation to risk-off assets, including oil and gold. Brent crude and gold prices jumped 1.5% and 2.3% respectively.
China Property: Country Garden, a major player in Chinese property sector, missed the extended deadline for outstanding debt payment. Another major developer Gemdale is also considered to be in financial trouble as its chairman has resigned. New home prices in China dropped again in September, indicating a weak demand in home sales that led to a tight cash flow for developers.
BoJ: As the 10Y yield hit a decade high, the Bank of Japan (BoJ) intervened in the market again. Because of the interest rate differentials between the US and Japan, it is the 5th time this month of BoJ intervention, especially when the 10Y yield in the US nearly reached the 5% psychological mark. BoJ may remove its yield curve control (YCC) with the upward revisions to the consumer price index forecast at the end of October.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Under the high rate environment, investors should focus on the strength in the balance sheet as it indicates whether the company is vulnerable to the rise in borrowing costs. Investors will favor companies that return cash to shareholders rather than those who make huge capex investments at the current stage.
UBS: Investors are suggested to use options to hedge their stock exposure to protect from the shock in markets or spike in equity volatility. It can help them to remain in the markets.
UBS: Historically, government bonds are considered as a hedge in times of uncertainy. However, it cannot perform as expected due to the high-yield environment. However, we expect the 10Y yield to drop to 3.5% by June 2024 as we see limited scope for the yields to overshoot 5%.
Morgan Stanley: The repricing of bonds is mainly driven by the high real rates and term premiums, but not the default risks. It is supported by the credit spreads. We recommend corporate credit as the return could be attractive next year, especially if the Fed cuts rates.
Barclays: Despite the strong data and firmed inflation, the Fed signaled clearly that it will pause in November, while the December hike is still likely.
Morgan Stanley: Rate cuts are still far away as the financial conditions are still tightening. The strong dollar, increasing oil prices and geopolitical tensions are against Fed hawks.
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