Stocks in London plummeted on Thursday as investors expressed caution over the ongoing conflict in the Middle East and the significant increase in 10-year Treasury yields. These concerns were compounded by remarks from Federal Reserve Chair Jerome Powell and a day of heavy earnings reports.
Investors are currently grappling with two conflicting narratives in the market. On one hand, there is the expectation of persistently high interest rates for an extended period of time. On the other hand, there is the looming threat of a war that could disrupt global geopolitics.
As a result, 10-year Treasury yields have surged to nearly 5 percent, the highest level in 16 years, causing stocks to lose ground. In response, investors have been abandoning bonds as a safe-haven option and flocking to gold, which has reached its highest point in two months.
Adding to the complexity of the situation is the ongoing third-quarter earnings season. Several major companies, including TSMC, the world’s most advanced chip maker, as well as Philip Morris, Blackstone, and Fifth Third Bancorp, are set to release their results.
The decline in London stocks is reflected in the MSCI All-World index, which was down 0.35 percent. Europe’s STOXX 600 also experienced a 0.7 percent drop, while Asian markets weakened overnight.
Meanwhile, U.S. Treasury prices have fallen for the fourth consecutive day, leading to a 7 basis point increase in the yield on the benchmark 10-year note to 4.968 percent. If this trend continues, it would mark the largest one-week rise in yields since April 2022.
Typically, when investors seek safe-haven investments, bonds are their top choice. However, with interest rates on the rise and a wave of debt supply expected in the coming weeks, other factors are at play. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, noted that the risk premium is now more evident in gold and the U.S. dollar than in bond yields.
The geopolitical situation, particularly the conflict in the Middle East, has not had the same impact on U.S. Treasuries as it has in the past. This highlights the unique circumstances facing the market today.
Looking ahead, U.S. stock index futures fell by around 0.2 percent, with electric vehicle manufacturer Tesla experiencing a 5.7 percent drop in pre-market trading due to a decline in gross margins in the third quarter. In contrast, streaming giant Netflix saw its shares rise by 13 percent following a surge in subscriber numbers in key markets during the previous three months.
However, the most significant event for the market is expected to be Jerome Powell’s speech on the economic outlook at the Economic Club of New York.
According to a Reuters poll of economists, the Federal Reserve is likely to keep interest rates unchanged when it meets on November 1. Furthermore, an increasing number of economists do not anticipate a rate cut until the second half of 2024.
The situation in the Middle East has also had an impact on the price of gold, which has risen by 0.14 percent to $1,950.50 per ounce, reaching a two-month high. The recent unrest in the region has caused gold to surge by 8 percent since the violent activities carried out by Hamas in Israel.
Tensions in the Middle East continue to be volatile following an explosion at Gaza’s Al-Ahli al-Arabi hospital. Palestinian officials claim that the incident, which resulted in the deaths of 471 people, was caused by an Israeli airstrike. However, Israel and the United States have attributed the explosion to a failed rocket launch by Islamist terrorists in Gaza, a claim which has been denied by the group.
Oil prices also experienced a decline on Thursday after the Organization of the Petroleum Exporting Countries (OPEC) showed no support for Iran’s call for an oil embargo on Israel. Additionally, the United States has announced plans to ease sanctions on Venezuela, allowing for an increase in global crude oil supply.
Over the past couple of weeks, crude oil futures have exhibited significant volatility, rising from $83 per barrel to $93. October has proven to be the most volatile month of trading for oil since November 2021, based on the oil volatility index.
Brent crude futures, which serve as the foundation for most global oil trades, fell by 1.4 percent to $90.19 per barrel, following a 2 percent increase the previous day. Meanwhile, U.S. crude futures dropped by 1.2 percent to $87.26.
In summary, London stocks plummeted as investor caution grew due to the Middle East conflict and rising Treasury yields. The market is torn between expectations of high interest rates and the potential disruption caused by a global conflict. The ongoing earnings season and remarks from Federal Reserve Chair Jerome Powell further contributed to the market uncertainty. These factors have led investors to abandon bonds and turn to gold as a safe-haven asset. However, the situation is unique, as geopolitical tensions no longer have the same
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