The focus of the market is on the escalation of war in Israel, which threatens to become a conflict involving surrounding countries.
Israeli Prime Minister Netanyahu has told President Biden that he has no choice but to launch ground operations. On the other hand, the Conference of Arab Countries meets tomorrow, Wednesday, and before this summit begins it has already criticized Israel and will not admit any incursion into the Palestinian territory of Gaza.
In this clear scenario of enormous global geopolitical tension, the market begins to take defensive positions.
The Nonfarm Payroll Recap
The first Friday of the month is when the US Nonfarm Payroll (NFP) is released, and this usually causes high volatility in the markets.
The first Friday of October was no exception. The report for September showed that 336,000 non-farm jobs were created. This is much higher than the expected 170,000 and the revisions of more than 100,000 from the previous month.
On the news the US Dollar rose, Treasury bond yields rose (the 10-year bond traded at 4.88%) and the stock market fell sharply.
Interest Rates, Gold & the Bonds Market
The US fixed income market was closed on Monday for a holiday, but even so there have already been purchases of treasury bonds (considered a safe haven asset) that have driven yields down. The 10-year bond fell to 4.67%. This movement will likely continue and intensify once the market is fully operational today.
Now, investors will leave behind the upward tensions in market interest rates due to bond sales motivated by the Federal Reserve's determination to maintain high rates for a long period of time and will focus on seeking safe assets such as Treasury Bonds.
As a result of the fall in market interest rates and because it is a safe haven asset, Gold opened on Monday with an upward gap of $20 and if the situation of instability continues, it threatens to continue recovering ground until at least the 1920 area, next technical reference level.
The Oil Market
The other asset that experienced the most notable movement yesterday was oil.
Although it is still early to be able to assess the situation, an escalation of war in the Middle East or simply a political confrontation could lead the producing countries in the area to production problems or to limit exports as political pressure, as occurred with the crisis in the 70's.
Before this possibility, oil opened with a bullish gap of around $3. It is a minor movement at the moment, but it could be the beginning of a bullish run that ends the price drop that has been experienced so far this month.
The rise in oil could also drag Natural Gas upwards since it is a product for alternative use in the generation of electrical energy. Yesterday the news was published that Israel was temporarily closing the extraction of natural gas from its Tamar field. In principle, the news in itself should not have a major impact on the market, but if these decisions extend to the rest of the extraction fields in the Middle East due to a war, the impact on the price of Natural Gas would be significant. Even more so when we soon enter the winter season with higher consumption for heating.
Natural Gas monthly chart, October 10th, 2023. Source: CAPEX.com WebTrader.
Consumer Price Index expected on Thursday
While awaiting other relevant data this week, such as the US Consumer Price Index (CPI), the shift in investors' risk sentiment that was seen on Friday may continue. If the underlying CPI shows significant signs of weakening, the market could already begin to discount at the end of the rate hikes, and this would have a positive impact on the stock market.
Over the weekend Israel declared war on Hamas. If this event causes intensified hostilities in the Middle East, the price of oil may go up. Markets may perform accordingly, and risk aversion may increase.
- The NFP figure showed 336,000 non-farm jobs were created in September.
- The result was much higher than the expected 170,000.
- Gold, labeled the safe-haven, has seen movements as it opened on Monday (yesterday) with an upward gap of $20.
- Oil opened with a bullish gap of around $3.
- Oil is now looking at the possibility of production cuts due to the geopolitical situation.
- The US CPI is expected on Thursday.
Sources: Bloomberg, Reuters