It’s a packed week ahead with U.S. inflation data, the start of Q3 earnings, a French budget, and possibly a big rate cut from New Zealand.
Investors are also on edge as Middle East tensions escalate, while Japan’s new Prime Minister Shigeru Ishiba is in the spotlight.
Here’s all you need to know about the week ahead in global markets.
1/ ONE YEAR OF WAR
One year on from Hamas’ October 7 attack on Israel and the region looks on the brink of a sprawling war that could potentially reshape the oil-rich Middle East.
The conflict, which has killed more than 42,000 people, the vast majority in Gaza, is spreading. Israeli troops are now in neighboring Lebanon, home to Iran-backed Hezbollah; Iran launched a large-scale missile attack on Israel last week.
Global markets have remained broadly unfazed. Oil prices, the main conduit for tremors further afield, jumped about 8% last week, but soft demand and ample supply globally have kept a lid on gains. A further escalation between Iran and Israel could change that, especially if Israel strikes Iran’s oil facilities, an option that U.S. President Joe Biden said was under discussion.
The scars of the conflict are visible in Israel’s economy, which has suffered several sovereign downgrades and seen its default insurance spike and bonds slide.
2/ BUSY TIMES
U.S. third-quarter earnings season is about to kick into gear, posing a test for a stock market near record highs and trading at elevated valuations.
JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), and BlackRock (NYSE: BLK) report on Friday. Other results earlier in the week include PepsiCo (NASDAQ: PEP) and Delta Air Lines (NYSE: DAL). Overall, S&P 500 companies are expected to have increased Q3 earnings by 5.3% from a year earlier, according to LSEG IBES.
Meanwhile, Thursday’s September U.S. consumer price index will be closely watched for signs that inflation is moderating.
Robust jobs numbers could mean smaller rate cuts from the Federal Reserve, which kicked off its easing cycle last month.
Elsewhere, investors will seek to gauge the economic fallout from a dockworker strike as U.S. East Coast and Gulf Coast ports reopened on Thursday.
3/ A RECKONING
France’s new government presents its long-awaited budget to parliament on Thursday. It’s planning a 60-billion-euro belt-tightening drive, around 2% of GDP, next year.
It reckons spending cuts and tax hikes should bring the deficit, seen rising to 6.1% this year in the latest upward revision, to 5% by end-2025. The target date for reaching the euro zone’s 3% deficit limit is also being pushed back to 2029 from 2027.
That’s bad news just ahead of rating reviews kicking off with Fitch next Friday.
Markets aren’t impressed. Having eased slightly, the extra premium France pays for its 10-year debt over Germany’s widened back to just under 80 bps, near its highest since August.
Ultimately, what may matter more is whether Prime Minister Michel Barnier can pass the budget, given a divided parliament that has investors questioning how long his government will last. Left-wing lawmakers filed a no-confidence motion against Barnier’s government on Friday, but it is not expected to pass.
4/ FEELING SHEEPISH
A reluctant joiner to global easing, the Reserve Bank of New Zealand is catching up fast.
It meets on October 9 and traders reckon the central bank could follow the Fed’s example and cut rates by half a point.
The RBNZ cut rates by 25 bps to 5.25% in August, a year ahead of its own projections.
The market price in drop below 3% by end-2025. This will still be above where traders think U.S. and euro area rates will be.
Shorter-term investors are neutral towards the Kiwi, but hedge funds have lapped it up this year.
Positioning and potentially higher rates than others might insulate New Zealand’s currency. So could the return of so-called carry trades and in this case, essentially a bearish bet on the yen in favor of bullish ones on high-yielders such as the kiwi.
5/ POLL POSITIONING
When Shigeru Ishiba surprised markets by winning the contest to become Japan’s prime minister, investors rushed to re-position themselves for higher interest rates.
A week on and the landscape looks different, as Ishiba back-flipped not just on monetary policy, but on prior market-unfriendly support for higher corporate and capital gains taxes.
It’s perhaps not surprising for a hawk to hide his talons with a snap election looming on October 27.
Even so, Ishiba was unabashedly blunt, saying after a meeting with the Bank of Japan – whose independence Ishiba has pledged to honor – that the economy is not ready for further rate hikes.
The yen, which had been surging, slid past 147 to a six-week trough by Thursday. Japanese stocks rebounded from their steepest slide since early August.
Check back in a month from now for any further policy flip-flops.
(Source: ReutersReuters)
