Gold rallies, stocks slump on strange mix of macro and geopolitics

Risk Off 

Wild moves in Treasury markets yesterday betrayed the rather febrile mood – the US 10yr Treasury swung 10bps as Fed chair Jay Powell spoke, kissing 5% for the first time in 16 years whilst stocks fell again. The selloff in fixed income and jump in yields yesterday once again saw stocks sold. The FTSE 100 ended the day down more than 1% despite the rise in oil prices, whilst the DAX shed a more modest third of a percent. Across the pond the S&P 500 dipped 0.85% and the Nasdaq fell by nearly 1%. All are on course for declines of more than 1% for the week. Asian markets fell again overnight and stocks are nursing weekly losses of 3-4% despite China injecting a record amount of cash in Open Market Operations. Asian tech felt the heat from soft third-quarter profit figures from chipmaker TSMC and shares across China hit fresh YTD lows. This morning European stock markets extended losses with London off more than half a percent and Paris and Frankfurt both down by more than 1%.   

Unstable World Makes for an Uneasy Market  

Fed chair Powell, speaking ahead of the blackout period before the next FOMC meeting, offered a cautious outlook but left the door open to further hikes. This saw yields first drop then rise to fresh cycle highs. The dollar now seems to be marking a bit of a range with DXY futures at 106. Gold rallied again despite the rise in yields – jumping to its best since late July at $1,982; decoupling like this is unusual and betrays fear. Macro is stills trumping geopolitics with bonds but it seems the reverse with gold with real rates remaining higher; 10yr TIPS just a whisker below 2.5%. Undoubtedly gold’s appeal as the safe haven of last resort is all that matters right now for bulls amid what’s probably the most precarious geopolitical situation since the end of the Cold War – first Ukraine, now Israel, the conflict is widening and going to becoming more and more protracted and complex. For Treasuries you not only have the Fed and a deteriorating long-term inflation outlook (higher for longer) but also a mountain of fresh issuance, rising deficits, quantitative tightening by the Fed, and the BoJ on the cusp of unloading onto the market a process of normalisation. Tit for tat – On another front, China says it might restrict graphite exports for use in EV batteries. It comes just days after the White House blocked sales of certain chips to China. It’s Trade Wars 2.0 and it’s inflationary. 

Struck Oil 

Middle East conflict fears helped send oil to its highest in three weeks as the war premium returned to crude. WTI touching $90 and Brent at $93. Bullish inventory data ran counter the recent trend - commercial crude stocks fell by 4.5mn barrels and Cushing stocks are at their lowest since 2014 as exports hit the highest since June. Prices slipped early in the week as the US indicated it would lift sanctions on Venezuela’s oil industry, but buying has picked up momentum into the latter half of the week. And on Wednesday recall that China data was better than expected with Q3 GDP +4.9% yoy and retail sales +5.5%. 

BoJ Intervention? 

USDJPY nudging up towards the big 150 level again this morning after Japan inflation slowed below 3% for the first time in over a year - CPI came in at 2.8% yoy in September vs f/c 2.7% and 3.1% previously. Core-core inflation rose 4.2% from 4.3% in August. Mr Yen - Japan's Vice Finance Minister for International Affairs Masato Kanda – talked the market down from touching 150 by making some opaque references to whether or not the BoJ actually announces intervention and when it ought to. It was just a wee nudge, but it seems to be working for the time being. Meanwhile BoJ officials are talking about ending negative rates this year.  

Swing Low Sweet Chariot 

Shocker of a night for the Tories as they lost two by-elections. Huge swing to Labour in both cases but two things for the Conservatives to hold onto: turnout was very low and the vote for the Reform Party in both cases, if it had been for the Tories, would have seen the latter hold on. But this points to the splintering and factionalism within the Tory Party that will be virtually impossible for Sunak to square in the next year. These are the kind of swings that beget landslides.