Investors eye asset havens amidst continued unrest in the Middle East

In focus today

Today the Bank of Canada announces its October monetary policy decision. Both markets and analysts are leaning towards a 50bp rate cut to 3.75% although it is a close call. Our base case is for a slight hawkish surprise as we pencil in a dovish 25bp cut to 4.0%.

Focus in the euro area is on the consumer confidence for October. Consumer confidence has risen greatly during the past year, but remains below its historical averages, which is likely one of the reasons for the weak private consumption.

Otherwise, market focus will remain on the earnings season following a continued decline for most asset classes since Monday. Oil and metals continued gaining since Monday, as unrest in the Middle East pushes investors to asset havens.

Economic and market news

What happened yesterday

In the US, equities broadly moved sideways amid investors digesting higher treasury yields, earnings reports and polls/prediction markets on the upcoming US presidential election.

US-China relations are set to intensify regardless of the US election outcome, with a potential new trade war under Trump leading to global economic uncertainty and CNY weakening, while a Harris win would continue Biden's strategy of managed competition, supporting Taiwan but avoiding provocation. For more on this, see Research Global - Trump vs Harris - what it means for US-China relations 22 October.

In the EU, risk of inflation undershooting ECB's 2% target combined with sluggish growth is a worry to central bank policy makers, as the speed of rates cuts may need to increase. Market economists argue that inflation is already near target, while rates are still at a constraining level.

In Hungary, the central bank announced it would maintain a rate decision of 6.5% in line with market expectations.

In the Middle East, the situation continues to escalate as Israel continued to strike Lebanon and Hezbollah announced new attacks on Israeli targets. Israel confirmed it had previously killed Hashem Safieddine, generally considered the 'number two' in Hezbollah before Hassan Nasrallah's assassination. This happened as the U.S. Secretary of State Antony Blinken visited Israel in the hopes of peace talks following the death of Hamas' leader Sinwar.

In metals space, unrest in the Middle East, the US election and falling interest rates continue to drive demand for metals as an asset havens. Notable gains were gold 0.95%, silver 2.89% and platinum 2.77%.

In Oil markets, Oil futures continued to gain following last week's decline. Both Brent and WTI ended the day up by 2.2%. This comes as investors were unconvinced U.S. Secretary of State Antony Blinken's visit to Israel would bring about any resolution to the Middle East situation.

Equities: Global equities were lower again yesterday, with broad-based declines across regions. When writing 'again' please note this marked the first time since early September that we saw back-to-back declines in the S&P 500. A significant reason for this is the comforting labour market data received over the last 1½ months following the spike in uncertainty in early August. Yesterday's declines were not massive, and three of the defensive sectors ended higher. In Europe, cyclicals even outperformed. This wait-and-see approach could very well continue for some days. We have numerous earnings reports coming up, but investors will likely postpone many of their decisions until after the US election on 5 November. In the US yesterday: Dow -0.02%, S&P 500 -0.1%, Nasdaq +0.2% and Russell 2000 -0.4%.

FI: Markets traded with a firm handle around the 2.31% in 10y Bunds yesterday while the 2y point briefly dived from 2.17 to 2.12% and back in the afternoon. The front-end, reaction came on the back of ECB governing council members being open to all options, not least Centeno highlighting the potential of 50bp depending on incoming data. Market added 3bp of rates cuts to the 2025 pricing to 111bp. Swap spreads continued tightening with the Bund-ASW spread now at 17bp.

FX: EUR and JPY lost out to commodity currencies yesterday. Among the notable moves, EUR/USD tested a drop below the 1.08 level and EUR/NOK fell below 11.80.