Markets
There were signs on Friday that Israel was preparing for an imminent ground invasion in Gaza City, upscaling the conflict into an outright war. With the weekend looming, markets sought shelter in core bonds.
US Treasury yields fell between 1.4 and 10.1 bps. The front end underperformed after consumer confidence from the Michigan University showed US inflation expectations unexpectedly shot up in October. The one‐year ahead gauge rose from 3.2% to 3.8% while the longer‐term indicator (5‐10 year) swelled from 2.8% to 3%. Confidence levels themselves dropped more than expected, from 68.1 to 63 on a combination of weaker current and future conditions. German yields followed the US, with declines ranging from 2.2 bps to 4.9 bps.
Peripheral spreads rose. Italy underperformed, adding 6 bps to top 200 bps again. Equities lost 1.5% in Europe and up to 1.2% in the US (Nasdaq). Oil prices rallied almost 6%, resulting in Brent settling above $90/b again. Gold (+3.5%, $1932) smashed the 50, 100 and 200 daily moving average in one go. The US dollar held the upper hand against most peers including the euro. EUR/USD finished just south of 1.05. Gains for the DXY (106.648) were marginal as a slightly stronger JPY offered some counterweight (USD/JPY eased to 149.57).
Friday’s moves are all going a bit in reverse this morning. The feared invasion ultimately didn’t take place, be it (officially) due to unfavourable weather conditions. But combined with the US ramping up diplomatic efforts to prevent the regional crisis to escalate into a wider one (that could include the likes of Iran), it is taking some pressure of markets. Treasuries and Bunds give up some of Friday’s gains. The poor performance on WS does leave traces on Asian‐Pacific stocks but indices quickly stabilized after gapping lower at the open.
The US dollar trades on the backfoot. Poland’s zloty outperforms following the opposition’s election victory (see below).
Today’s empty economic calendar probably keeps the Israeli‐Hamas conflict in the spotlights. We could see current moves (ie slightly weaker dollar, core bond yields adding a few bps) extend into European and US dealings but we don’t expect any excessive moves. Needless to say the situation remains very delicate. There are several Fed and ECB speeches scheduled for today and by extension later this week.
Economic data include US retail sales tomorrow and Chinese Q3 GDP growth on Wednesday. The UK takes center stage with a broad update about the labour market, inflation and retail sales.
News and views
An exit poll conducted by Ipsos suggests that the Polish opposition centered around the Civic Platform from former PM Tusk will be able to dethrone the ruling PiS‐party from current deputy prime minister Kaczynski which has been in power since 2015. PiS is projected to remain the biggest Polish political party, winning 36.8% of the vote, and should normally get a first shot at trying to form a government.
Together with its likely coalition party, the extreme‐right Confederation (6.2%), it gathers only 212 seats in the 460‐seat Polish parliament though. Tusk’s Civic Platform (31.6%), the center‐right Third Way (13%) and the Left (8.6%) do have a route to a parliamentary majority (248 seats). Voter turnout was on course for a record with Ipsos putting it at almost 73% (up from 62% in 2019). Officials (full) results aren’t expected before late today or even early tomorrow, but Tusk is already claiming victory while Kaczynski prepares for a stay in opposition. The Polish zloty was anticipating such (pro‐EU) outcome, rallying from EUR/PLN 4.65 at the beginning of the month to 4.55 ahead of the vote. This morning, PLN extends its run to the EUR/PLN 4.45 area.
New Zealand’s opposition secured a parliamentary election as well. The National Party gained 39% of the vote (50 seats; +16) compared to 23% for the ruling Labour party (34 seats; ‐28). Christopher Luxon’s National Party is likely to team up with ACT New Zealand (11 seats; +1) and NZ First (8 seats; +8) to get control in the 120‐seat NZ parliament. All three likely participants campaigned on cutting government spending and getting tougher on criminals and welfare beneficiaries while they favor farmer‐friendly policies and could become somewhat more pro‐China. The kiwi dollar is marginally stronger at NZD/USD 0.5925 this morning (from last week’s close at 0.5885) but general USD weakness is the likely reason.
