Geopolitical Tensions and a Paradigm Shift to Global Instability

As we reflect on the events of the past week and brace for the uncertainties of the coming one, the global financial landscape remains dynamic and challenging. Here’s a detailed breakdown of recent market trends and what to expect in the days ahead.

Last week, the spotlight was on yields and geopolitical developments. Despite the US Consumer Price Index (CPI) reporting a YoY increase slightly higher than expected, yields did not reach new highs. Simultaneously, the unsettling situation in Israel and Gaza injected uncertainty into risk assets.

The Six Key Highlights:

1. Israel-Hamas Conflict: Geopolitical tensions led to a flight to quality, with bonds rallying and Gold soaring.
2. Fed Speakers Adopt a Slightly Dovish Tone: Despite robust data, some Fed speakers signaled a dovish stance, suggesting that rising yields are doing the Fed’s work.
3. Fed Minutes Reiterate “Higher for Longer”: The Fed’s stance of maintaining higher rates for an extended period was echoed in the Fed Minutes.
4. US CPI Data: The US CPI data indicated slightly higher inflation than anticipated, reflecting persistent inflationary pressures.
5. Market Moves: Equities, bonds, forex, and commodities exhibited notable shifts, influenced by a range of factors, including yield movements and geopolitical events.
6. What’s Ahead: The week ahead promises insights from central banks, macroeconomic data releases, and a busy earnings season featuring Tesla, Procter & Gamble, Johnson & Johnson, AT&T, Netflix, Bank of America and Taiwan Semiconductor.

US Dollar’s Resilience:

The US Dollar continued its upward trajectory, bolstered by the CPI data. The DXY index posted a 0.5% gain.

Mixed Performance of Major Currencies:

The Euro and the Pound showed mixed performances, weakening against the Dollar but gaining ground against other currencies. The EURUSD hovered around the 1.05 mark, prompting discussions of parity.

Commodity currencies had a varied week, with the NOK and CAD trading sideways, while the AUD and NZD saw approximately 1.5% declines against the greenback. The JPY remained relatively stable, while the MXN and CHF posted modest gains.

Oil’s Rollercoaster Ride:

Oil prices experienced a sharp reversal, recouping most of the previous week’s losses due to events in Israel and Gaza. WTI rallied 6%.

Precious Metals Shine as Safe Havens:

Precious metals, including Gold and Silver, had a strong week as their safe-haven appeal resurfaced. Both closed over 5% higher, respectively.

Equities Remain Resilient:

Despite several reasons for caution in risk assets, equities continued to exhibit resilience. The S&P500 index gained 0.3%, while the DAX experienced a 0.8% decline.

Bonds Find Safe Haven:

Escalation in Israel and Palestine led to safe-haven flows into bonds, resulting in an unusual weekly gain. The 10-year UST yield fell 15bps to 4.63%, while the 10-year Bund rallied 1.5%.

Looking Ahead

Geopolitical Uncertainty Persists: Escalation in Israel and Palestine will continue to be a focal point this week. We hope for diplomatic efforts to de-escalate the situation, which could influence market sentiment.

Yields’ Crucial Role: Yields remain a critical factor, with the 10-year UST yield potentially stabilising for the time being. Market participants will closely monitor yield movements for their impact on various asset classes.

Inflation Data Releases: The upcoming week features significant inflation releases from Japan, the Eurozone, the UK, New Zealand, and Canada. These data points will provide insights into inflationary pressures worldwide.

Investors face the challenge of deciphering market signals amidst geopolitical turbulence and economic data. US retail sales, industrial production, housing starts, and Fed Chairman Jerome Powell’s speech are all on the horizon. As earnings season ramps up, companies like Tesla and Procter & Gamble will likely influence their respective sectors.

A Paradigm Shift in Global Instability:

We find ourselves in a new era of global instability, marked by fiscal deficits, mass migration, and deglobalisation. The pandemic and inflation have acted as catalysts, reshaping the post-WW2 consensus. Governments are expected to raise taxes, incur higher deficits, and increase spending on defence, reminiscent of the post-Cold War era.

In this evolving landscape, it is essential to stay vigilant, adapt to changing conditions, and consider strategies that align with the emerging paradigm of economic and geopolitical challenges.

As always, for personalised insights and guidance tailored to your unique financial situation, we encourage you to reach out to our financial advisers.

Sources: Reuters, Bloomberg, CNBC and Financial Times

FAQs

1. What were the main drivers of market volatility last week?

Last week, the primary drivers of market volatility were fluctuations in bond yields and escalating geopolitical tensions in Israel and Gaza.

2. How did the US Dollar perform in response to economic data?

The US Dollar continued its upward trajectory, gaining 0.5% as a response to the US Consumer Price Index (CPI) data.

3. Were there any significant developments in major currencies?

Major currencies, including the Euro and the Pound, had mixed performances. They weakened against the Dollar but gained against other major currencies.

4. What impact did rising yields have on commodity currencies?

Rising yields exerted downward pressure on commodity currencies. The AUD and NZD, for instance, saw approximately 1.5% declines against the US Dollar.

5. How did oil prices behave during this period?

Oil prices experienced volatility but ultimately reversed most of the previous week’s losses, rallying 6%.

6. Did precious metals exhibit any trends?

Yes, precious metals, including Gold and Silver, had a strong week, gaining over 5% in value.

7. How resilient have equities been in light of these challenges?

Despite various factors that could have led to bearish sentiment, equities remained resilient. The S&P500 index gained 0.3%.

8. What happened in the bond market during this period?

Bonds experienced safe-haven flows, resulting in a rare weekly gain. The 10-year UST yield fell 15bps to 4.63%, while the 10-year Bund rallied 1.5%.

9. What key events should investors watch for in the coming week?

Investors should closely monitor geopolitical developments in Israel and Palestine, yield movements, and crucial inflation releases from various countries.

10. What insights can be drawn from recent market events?

Recent events highlight the importance of staying informed, adapting to changing market conditions, and considering strategies in the face of evolving economic and geopolitical challenges.

If you have specific questions or concerns about your investments, don’t hesitate to reach out to our financial advisers for personalised guidance and recommendations.