Early Asia wrap: Riding coattail

Asian shares have ridden the coattails of an after-hours bid on Wall Street futures. All the while, investors eagerly await an anticipated fall in core inflation for September, possibly pushing the annual rate down from 3.9% to 3.7%. However, given the gloomy market forecast, it's uncertain how investors will ultimately react to positive data, but if the print comes in hot, it won't be pretty. 

The dollar remains in the driver's seat, trading above the crucial 150-yen threshold. However, traders remained vigilant for signs of currency intervention in anticipation of Tuesday's Bank of Japan's upcoming policy meeting.

However, worrying tail risk abounds with factors like the conflict in Gaza, a strong US dollar, surging interest rates, and excessive government spending contributing to market stress. Market positioning is at extreme levels, and gold prices are increasing, indicating heightened concerns and potential risks in the financial markets.

Reports of Israeli tanks carrying out raids Into Gaza should see gold and oil hold a bid into the weekend, even if the right side tail looks thin( on gold)  against the backdrop of higher real rates.

The current conflict in the Middle East has not significantly impacted the oil supply. And while there has been a limited reduction in natural gas volumes, such as the shutdown of the Tamar natural gas field in Israel, this has only slightly affected global LNG exports in October. 

However, the disruption highlights the gas market's reduced ability to respond to adverse shocks, especially considering its ongoing supply constraints following the loss of Russian supply in 2022. As a result, European natural gas prices have risen by 32% since the attacks in Israel, considerably more than the increases in Brent crude oil prices (4%) and gold (8%).

Still, with IDF tanks rolling, traders must hedge at least the first of possibly 2  supply disruption scenarios,  as increasing Western scrutiny of Iran's oil exports could be the first domino to topple. But the ultimate payday for long oil is in the event of a severe supply downside tail scenario involving an interruption of trade through the Strait of Hormuz.