Stocks More Mixed After a Big Rally

Gog and Magog

Israel is ready to wipe out the militant group Hamas. For traders we witnessed the geopolitical risk premium on oil rising, with Brent jumping to $89 from below $84 and largely holding on the gains as of this morning around $88, two full days of trading clear of the initial gap higher. We are also seeing bond yields retreat but I don’t think this is the lasting play. Escalation? It will of course escalate vastly – but can it be contained to Gaza or will it spread? President Biden:

"Let me say again to any country, any organization, anyone thinking of taking advantage of the situation, I have one word: don’t."

European Markets Surge

Stocks across Europe had their best day in 11 months on Tuesday amid declining Treasury yields and hopes for more stimulus from China. Beijing is considering raising its budget deficit for 2023 to boost the economy. That helped lift the Stoxx 600 2% higher, with travel & leisure catching some recovery bid following a decline on Monday. Mining stocks helped the FTSE to gain 1.8% whilst luxury lifted the CAC by 2%. The DAX also rallied 2%. We are seeing a mixed bag today - some giveback on the rally this morning with the CAC back down 0.5% with LVMH falling 6% on slowing sales growth; the DAX shedding 0.4% before turning flat and the FTSE eking modest gains with Shell and BP jumping.

US Treasury Dynamics

The US 10yr Treasury yield declined further to 4.63% this morning from last week’s 16-year highs at 4.887%.

“Bonds should be the best performing asset class in the first half of 2024”, said Bank of America’s Michael Hartnett last week.

He is “impatiently waiting for capitulation selling, and a recession or credit event to trigger bullish policy easing”. Declining yields helped boost Wall Street, with the S&P 500 up 0.5% and small cap Russell 2k rising more than 1.1%. Vix showing yields > geopolitics – down again.

Fed's Stance and Jobs Data

We've had some relatively dovish comments from Fed officials to soothe sentiment and further trim yields. Atlanta Fed president Raphel Bostic said “a lot” of the 11 rate hikes delivered since March 2022 are yet to filter through the economy.

"I actually don't think we need to increase rates anymore" he said.

Despite a blowout jobs report on Friday, expectations for a Nov rate hike have come down to just 13% from around 30% last week. The NFP jobs report came in at +336k vs 170k expected – 33rd month of jobs gains and revisions now turning higher after multiple months of downward revisions.

Today's Key Financial Updates:

Today – US PPI inflation forecast at +0.3%, core at +0.2%. FOMC meeting minutes are also due up to offer some more colour around the September decision and what is expected in November. Remember though it’s still a question of how long rather than how high. German inflation confirmed down to 4.5% in September, a notable step down from August’s 6.1%.