Asian stocks have been riding the coattails of an after-hours bid in Wall Street futures. Meanwhile, investors are eagerly awaiting an expected drop in core inflation for September, which could push the annual rate down to 3.7% from 3.9%. Given the market’s gloomy outlook, it’s uncertain how investors will ultimately react to positive data, but if the print is hot, it won‘t be pretty.
The dollar remains in the driver’s seat, trading above the key 150-yen level. However, traders remain on the lookout for signs of currency intervention ahead of the Bank of Japan‘s policy meeting on Tuesday.
However, worrying tail risks abound, with factors such as the Gaza conflict, a strong US dollar, rising interest rates and excessive government spending contributing to market stress. Market positioning is at extreme levels and gold prices are rising, indicating heightened concerns and potential risks in the financial markets.
Reports of Israeli tank raids into Gaza should keep gold and oil bid into the weekend, although the right tail looks thin (on gold) against the backdrop of higher real interest rates.
The current conflict in the Middle East has not significantly affected oil supplies. And while there has been a limited reduction in natural gas volumes, such as the shutdown of the Tamar natural gas field in Israel, this has had little impact on global LNG exports in October.
However, the disruption highlights the gas market’s reduced ability to respond to adverse shocks, particularly in light of ongoing supply constraints following the loss of Russian supply in 2022. As a result, European natural gas prices have risen 32% since the attacks in Israel, significantly outpacing increases in Brent crude (4%) and gold (8%).
Still, with the IDF tanks rolling, traders need to hedge at least the first of potentially 2 supply disruption scenarios, as increasing Western scrutiny of Iran’s oil exports could be the first domino to fall. But the ultimate payday for long oil is in the event of a severe supply downside tail scenario involving a disruption of trade through the Strait of Hormuz.
