Middle East – Geopolitical risks on the rise
Geopolitical risks are back in focus as Israel-Gaza tensions quickly erupted in a war. The market’s implications depend on how broad the conflict evolves. If the war scope remains regional, the market impact is unlikely to last long. However, should other regional players join the conflict, markets will look at it as a proxy for US-Iran confrontation. This second case could lead to heightened global tensions and material disruption to oil supply, as Iran production has been trending higher for most of 2023, and Saudi production may be felt at risk too. Weaker equities and credit, higher rates and commodities would thus be the most likely scenario on a further escalation, though not in the base case of a fully local conflict.
US – Fed speakers vs inflation
Fed speakers have acknowledged the tightening of financial conditions due to higher long end yields, and some have argued this may remove the need for further rate hikes. Disputing this, inflation surprised to the upside by 0.1% last week, with headline CPI at 3.7% YoY and core at 4.1% YoY. The rise was driven by an unexpected rise in shelter, for which we know that leading indicators point lower and so the underlying picture of easing price pressures remained intact. The Fed is scheduled to meet on November 1st next, and markets only price 4bps or 16% odds of a hike.
Algebris Investments’ Global Credit Team
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