Markets are volatile at the moment as both fear of recession and fear of inflation remain key influencers. But overriding all of this of course is equity outflows due to the ongoing high tension in the Middle East. Market participants will continue to pay close attention to headlines surrounding the Israel-Hamas conflict and political developments in the US. Israel continues to prepare for a ground operation while skirmishes are taking places in the north of the country with Hezbollah increasingly intertwined with events.

As the risk of escalation grows, oil prices continue to drift higher, and gold has surged as much as 10% to five-month highs. The precious metal is regarded as a store of value during times of geopolitical and market uncertainty. This driver is currently trumping the huge rise in real bond yields, that is, US bond yields adjusted for inflation, which would historically have pushed the price of bullion lower as it makes the zero-yielding metal less attractive. Record central bank buying over the past year has also supported gold. Prices look modestly overbought as they try to breach the key psychological $2000 level with the year-to-date May high at $2067.

Aside from geopolitics, those Treasury bond yields will continue to remain in the spotlight driven by stronger than expected US economic data. The macro momentum will be put to the test by the release of the October PMIs and Q3 flash GDP data. While growth has stayed strong, tighter financial conditions are likely to see activity weaken towards year end. PMIs for the euro area and the UK are also forecast to stay well in sub-50 territory across the board. This will keep the ECB fairly quiet with broad consensus that rates have now already hit a record high. Any big hints that a December final hike is still on the table will boost the single currency.

The US third quarter earnings season will remain a heavy focus with the tech megacaps like Alphabet, Microsoft and Meta reporting their results in a volatile environment for stocks. The Facebook and Instagram owner has been one of this year’s best performers on the US equity markets with its shares up more than 150% year-to-date after a calamitous 2022. Attention will again be on its Reality Labs division, which is its unit responsible for building the metaverse.

Major data releases of the week:

24 October 2023, Tuesday

–Eurozone PMIs: Expectations are manufacturing to rise to 43.7 from 43.4 and services to tick lower to 48.6 from 48.7. The composite is seen rising to 47.4 from 47.2 in September. Soft data is pointing to a more prolonged downturn and possible recession in the region.

25 October 2023, Wednesday

-Australia CPI: Consensus expects the annual rate to print at 5.4% from 5.2% and the quarterly rate at 1.1% from 0.8%. There is some uncertainty around the data. The recent RBA minutes tilted to the hawkish side hinting at further tightening if inflation is more persistent. The AUD has suffered with the negative risk mood and sits just above long-term lows around 0.63.

-Bank of Canada Meeting: Rates are likely to be kept steady at 5% with just a 20% chance of a 25bps rate hike. The recent inflation data cooled more than expected while Q2 activity contracted. But the bank may keep its options open as the job market remains resilient.  The risk backdrop is also not helping CAD and likely means it will trade defensively in the near term.

26 October 2023, Thursday

–ECB Meeting: Markets fully expect rates to remain unchanged. Inflation has eased further with the core falling to 4.5% from 5.3% and the PMI data remains deep in contractionary territory. Rates are seen as sufficiently restrictive according to most policymakers. The euro has remained relatively solid in the face of surging US yields and USD strength. Resistance sits at 1.0634/39.

–US GDP: Expectations are for Q3 growth to rise to 4.3%. The consumer has stayed strong with leisure and tourism especially firm. Last week’s retail sales figures confirmed the ongoing strength in consumer spending.

27 October 2023, Friday

–US Core PCE: Economists forecast the headline and core to rise 0.3% m/m. But the annual rates are seen dipping which points to lower prices into next year. The deflator is the Fed’s favoured measure of inflation. We are now in the blackout period for Fed officials ahead of their meeting on November 1. Comments from Chair Powell last week generally stuck with the “proceed carefully” messaging that we’ve had from other FOMC members.