Episodes
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1. Macroeconomic events and risks
In the US, nonfarm payrolls surged by 254,000 in September, with unemployment edging down to 4.1%. Wages grew 0.4% monthly and 4.0% annually, beating forecasts. US Treasury yields spiked after the report, as markets increased bets on rate cuts in November and December, signaling healthy labor market momentum. Meanwhile, US CPI inflation hit 2.4% in September, with core CPI rising 3.3%—both slightly higher than expected.
In Europe, the ECB followed through on its anticipated 25 basis point cut, lowering its deposit facility rate to 3.25% at the October 17 meeting. The ECB’s dovish stance reflects easing inflation risks and slow economic growth. Markets are pricing an additional 25 basis point reduction in December, which could lower the rate to 3.0%.
Oil prices have been volatile. After surging in early October due to Iran's attack on Israel, prices fell as fears of a wider conflict abated. Brent crude sits at $75, up 2% for the month, while US crude remains flat at $71. The geopolitical risk premium has partially unwound, but tensions in the Middle East keep the oil outlook highly uncertain.
2. Geopolitical events and risks
The situation in the Middle East remains fluid. Following Iran’s rocket attack on Israel, tensions have risen, though an attack on Iran’s oil infrastructure seems unlikely at this stage. Israel’s plans remain unclear, but the possibility of a broader conflict continues to loom. A direct confrontation could drive up oil prices, although for now, geopolitical risks are largely priced in without dramatic market moves.
3. Market trends and potential risks
US equities have continued to climb, with the S&P 500 up 3.5% and the Dow Jones gaining 3.4% over the past month, driven by optimism around potential Fed rate cuts. European equities have also risen, with Germany’s DAX up 4.1%. Emerging market equities have been mixed, with Hong Kong’s Hang Seng Index rising 15.1% due to Chinese stimulus but later retreating.
US bond yields have risen sharply due to inflation fears tied to the ongoing oil uncertainty. The US 10-year Treasury yield now stands at 4.03%, while the 2-year yield is at 3.95%.
4. Currency trends
The US dollar index strengthened by 2.6% over the past month, appreciating versus the euro by 2%. The dollar also gained 1.2% against the Canadian dollar and 4.8% against the yen.
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Macroeconomic Overview
In the US, nonfarm payrolls rose by 142,000 in August, improving from July but falling short of forecasts. The unemployment rate edged down to 4.2%, and wage growth exceeded expectations, reflecting a resilient labor market. The Federal Reserve responded by cutting interest rates by 50 basis points, bringing the rate to 4.75%-5.00%, signaling confidence that inflation is moderating. US inflation slowed to 2.5% in August, its lowest since 2021, although housing costs remain a concern, contributing to ongoing price pressures.
In Europe, inflation declined to 2.2%, with reductions in Germany, France, and Spain. The European Central Bank (ECB) implemented a 25 basis point rate cut, its second this year, as the eurozone contends with sluggish growth and cooling inflation. While markets anticipate further rate cuts, ECB officials are cautious, opting for a data-driven approach to future policy decisions.
Geopolitical Risks
Tensions in the Middle East have intensified, especially in Lebanon, where Hezbollah vowed retaliation against Israel following a deadly attack in September. Despite the heightened elevated risks, markets have shown resilience, as seen in the ongoing decline in oil prices, driven largely by demand concerns from China.
Market Trends
US equities experienced minor declines, with the S&P 500 falling 0.9% over the past two months. Despite an all-time high in mid-September following the Fed’s rate cut, concerns about underlying economic weakness led to a pullback. European stocks remained stable, with Germany’s DAX up 1.0% while France's CAC and the STOXX Europe 600 saw slight declines. In Asia, Japan’s Nikkei dropped over 10%, reflecting volatility from the unwinding of yen carry trades.
Bond yields in the US fell, with the 10-year Treasury yield down to 3.71%, driven by softer inflation data and expectations of further rate cuts. In Europe, yields also dropped, reflecting weaker economic outlooks across the region.
Gold performed strongly, rising 4.6% to a new high of $2,611, as market volatility and recession fears boosted demand for safe-haven assets. Conversely, Bitcoin fell by 7.5%, as riskier assets faced greater selling pressure.
Currency Trends
The US dollar weakened over the past two months, with the Dollar Index down 3.2%, driven by falling Treasury yields. The euro gained 2.1% against the dollar, while the Japanese yen surged 10.3% as speculators unwound carry trades. The British pound also strengthened, rising 1.9% against the dollar, reflecting optimism about the UK economy.
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