Asian stock markets faced a decline on Monday, driven by concerns over Israel’s military actions in Gaza, which have raised fears of a broader conflict. These concerns come ahead of crucial central bank meetings scheduled in the United States, Britain, and Japan. In particular, the Bank of Japan’s (BOJ) policy meeting may bring about a significant shift.
The ongoing earnings season is also in the spotlight, with major companies such as Apple, Airbnb, McDonald’s, Moderna, and Eli Lilly & Co set to report this week. So far, the earnings reports have been somewhat disappointing, contributing to the S&P 500’s descent into correction territory at 4,117.
BofA analysts expressed concern, stating that the price action is unfavorable, as the S&P 500 was unable to defend the key 4,200 level. They believe there’s a risk that it might head towards the 200-week moving average of 3,941 before any significant trading rally.
Early on Monday, S&P 500 futures managed a 0.3% uptick to 4,152, following a sharp decline on Friday. Nasdaq futures also increased by 0.5%.
The Middle East conflict, where Israel is pushing to surround Gaza’s main city, has dimmed risk appetite. This is termed a “second phase” of a three-week war against Iranian-backed Hamas militants.
MSCI’s broadest index of Asia-Pacific shares outside Japan declined by 0.2%, having reached a one-year low the previous week.
The Nikkei in Japan fell by 1.0%, with speculations suggesting that the Bank of Japan (BOJ) might make adjustments to its yield curve control (YCC) policy following its two-day policy meeting scheduled to conclude on Tuesday. While many analysts expect the central bank to raise its inflation forecast to 2.0%, there is uncertainty about whether it will abandon YCC in the face of market pressure on bonds.
Barclays analysts believe that due to remaining uncertainties in wage outlook and global bond markets, the BOJ may opt for a cautious approach, making the abandonment of YCC a close call. If the BOJ does adjust its policy, it might do so less drastically, possibly by increasing the ceiling for 10-year yields, similar to what it did in July. Abandoning YCC could result in Japanese bond yields rising, adding to the pressure on global markets, which have already been impacted by a severe sell-off in U.S. Treasuries.
Meanwhile, the yield on 10-year Treasuries reached 4.87% on Monday, rising by 30 basis points this month and reaching 16-year highs at 5.021%. The Treasury’s refunding plans, set to be announced on Monday, are expected to indicate more increases. NatWest Markets anticipates $885 billion of marketable borrowing in the fourth quarter and $700 billion in the following quarter.
Analysts are convinced that the sharp increase in market borrowing costs will lead the Federal Reserve to maintain its current policy stance at its meeting this week. Futures suggest a 97% likelihood of interest rates staying at 5.25-5.5%. The market has already priced in 165 basis points of easing for 2024, commencing around mid-year.
Analysts at Goldman Sachs believe that the rise in yields is equivalent to an increase of 100 basis points in interest rates. They argue that the story of the year has been that despite economic reacceleration, further labor market rebalancing and progress in the fight against inflation continue. They expect this trend to persist in the coming months.
On Friday, job figures will be released, with forecasts indicating an increase of 188,000 in U.S. payrolls for October, following September’s robust gain. However, annual growth in average earnings is expected to slow to 4.0% from 4.2%.
The Bank of England is also expected to maintain its current policy this week, with the market pricing in a 70% chance that it is done tightening altogether.
Surprisingly, the recent surge in U.S. yields has not had a significant impact on the U.S. dollar. Capital Economics analysts note that the fall in global equity markets and the ongoing uncertainty surrounding the Hamas-Israel conflict have not boosted the dollar against risk-sensitive currencies. They suggest that a relatively optimistic outlook for the U.S. is already largely factored into the dollar’s value.
The dollar remained steady against a basket of currencies at 106.580, after fluctuating between 105.350 and 106.890 last week. It gained slightly against the yen, reaching 149.77, though still below the previous week’s high of 150.78.
The euro maintained its position at $1.0563, with minimal changes during the month so far.
In the commodity markets, gold remained stable at $2,003 per ounce.
Despite concerns over Middle East tensions, oil prices eased as demand worries overshadowed potential supply disruptions. Brent crude lost 96 cents, falling to $89.52 per barrel, while U.S. crude declined by $1.00, reaching $84.54 per barrel.
