Aurelia Butler

LONDON (Reuters) – Conflict in the Middle East is escalating once more, but the mood music across financial markets remains upbeat for now due to shifts in oil production and as global interest rate cuts eclipse geopolitics. Israel, still battling Hamas in Gaza, bombed Beirut on Thursday as it continued its conflict with Lebanese group Hezbollah days after being attacked by Iran. Yet MSCI’s world stock index is just 1% off last week’s record highs and oil prices, which rose around 5% in the 24 hours after Iran’s missile attack on Israel, have steadied around a far from threatening $75 dollars a barrel. Certainly, a bigger escalation that disrupts supplies of oil from the Middle East and shakes the global economy would invoke a bigger reaction, and the fact that stock markets are near record highs could make them vulnerable to sharp falls.But for now markets are cushioned by the prospect of more monetary easing and by the United States’ expanded role in oil production, which has offset the Middle East’s dominance.Wall Street’s so-called fear gauge, the VIX volatility index, is at a moderate level around 20 – well below a post-pandemic peak above 60 hit during market turmoil in early August linked to an unwind in global carry trades. “When we think about geopolitical risk and its transmission into asset prices, what will obviously have a bigger impact is if we see outcomes that materially impact growth or inflation,” said Mark Dowding, BlueBay Asset Management’s chief investment officer.”The main concern really has been through a transmission impact on oil prices. But even here, we’ve been in a situation where, if anything that the oil price had been sliding.”The United States becoming a big oil producer – the world’s biggest for the past six years – has reduced global sensitivity to Middle East supply disruptions, analysts say. And European energy markets have reorganised themselves since Russia’s invasion of Ukraine, which was a dramatic example of how an energy price surge can roil global markets and economies. “The growing importance of the U.S. would suggest that risks to energy supply from rising tensions in the Middle East are somewhat mitigated,” said Katharine Neiss, chief European economist at PGIM Fixed Income. DIFFERENT TIMESIn 2022, when Russia invaded Ukraine, oil prices surged above $100 and gas prices soared, unleashing a fresh wave of inflation that piled pressure on central banks to hike interest rates, driving bond yields higher, especially in the U.S. and, in turn, boosting the dollar.The situation today is different. Central banks are already in easing mode and hopeful the U.S. will avoid recession. The world economy is not primed for an oil shock, said Trevor Greetham, Royal London Asset Management head of multi asset, because it is at a “softer stage of the cycle.”That contrasts with 2022, “when Ukraine happened, you were already in that period where you were just starting to get very high inflation numbers,” Greetham said.The current backdrop of easier monetary policy supports investor sentiment, even as tensions in the Middle East rise.Tilmann Kolb, emerging markets strategist at UBS Global Wealth Management, said that while the past two years had seen significant developments in domestic and international politics, for markets, the economic outlook remained key.”Where is inflation going? How is the Fed responding? Is growth holding up?,” he said.Meanwhile, investors have jumped on announcements of long-awaited economic stimulus measures from China that have sent Chinese shares surging, and boosted global assets from luxury stocks to industrial metals and miners.”The impact of China delivering a big policy stimulus last week was almost a more significant factor in terms of what it means for global demand and growth,” said BlueBay’s Dowding.RISK ON TO RISK OFFOf course, the dial could swing very quickly and oil itself remains the transmission mechanism if geopolitics flare further. Tina Fordham, founder and geopolitical strategist at Fordham Global Foresight, said she was watching to see if Israel would target either Iran’s energy infrastructure or nuclear facility.”Either of those targets would result in a market impact,” she said. “Where this could get more problematic is, for example, if Ukraine targets Russian energy infrastructure at the same time.”And with stock markets near record highs, there is scope for dramatic tumbles, policymakers warn.The Bank of England said on Wednesday that global asset prices remain stretched and are vulnerable to a big fall as investors grow more concerned about geopolitical risks.And for Andrew Bresler, CEO at Saxo UK, assets are mispriced given geopolitical risks, adding that volatility indicators such as the VIX should be higher. “It’s a little bit alarming to me how desensitised markets are to geopolitical risks,” he said. More

BANGKOK (Reuters) – Thailand’s finance minister said he had met the central bank governor on Thursday and discussed the issue of high household debt and the need for liquidity, as he made another pitch for a rate cut to spur revival of a sluggish economy. Lowering rates would help increase liquidity and help those who are creditworthy to access new loans as they recover, Pichai Chunhavajira said after emerging from a meeting with Bank of Thailand chief Sethaput Suthiwartnarueput that lasted nearly two hours. “We want to see more liquidity and the BOT is in agreement,” he said, adding financial institutions in Thailand were risk adverse. The BOT in August held key interest rates at a decade-high of 2.50% for a fifth straight meeting, so far resisting calls from the government for a rate cut. Pichai said monetary easing would help improve credit access. He did not say what the BOT governor said of interest rates during the meeting.The central bank declined to comment on what was discussed as its next monetary policy review is on Oct. 16. Thailand’s economy, Southeast Asia’s second-biggest, has recovered from the pandemic only slowly and is lagging regional peers, shackled by a slowing manufacturing sector and stubbornly high levels of household debt. Its household debt to GDP ratio was 89.6% at the end of the second quarter, or 16.3 trillion baht ($506.53 billion), among the highest levels in Asia. The finance ministry and central bank will meet again this month to discuss the inflation rate target in more detail, Pichai added. Thailand’s inflation target range of 1% to 3% is reviewed annually with agreement from the BOT and Finance Ministry before cabinet approval by the end of the year. The meeting, plans for which were first reported by Reuters, follows months of government pressure to cut rates and align with fiscal policy aimed at stimulating the economy.Pichai expects an agreement over inflation target this month with 2024 inflation coming in under 1%.The two also discussed global events that triggered capital inflow, resulting in baht’s recent rally, he said.Fourth quarter exports should do well, despite the strong currency, he added. Thai exports, a key engine of the economy, are expected to grow 2% this year, but the baht’s rally is posing the a big challenge for the rest of the year, businesses said. More

Firms announced 72,821 layoffs last month, down 4% from the 75,891 announced in August, which had been the highest since March, outplacement firm Challenger, Gray and Christmas said.For the year-to-date, however, announced staff reductions through September of 609,242 are 0.8% higher than through the first nine months of 2023, exceeding the prior year’s running total for the first time this year. That running total is the highest since 2020, the year the COVID-19 pandemic struck, when nearly 2.1 million layoffs were announced through that year’s first nine months.That increase, however, has not so far been paralleled by other data measuring job losses, such as the Labor Department’s weekly report on filings for unemployment benefits. In the week ended Sept. 21, for instance, filings for new claims slid to a four-month low and the level of overall benefits rolls has shown little change in recent months.”We’re at an inflection point now, where the labor market could stall or tighten,” said Andrew Challenger, senior vice president of Challenger, Gray and Christmas. There are signs the U.S. job market is cooling off, enough so that the Federal Reserve has shifted its efforts to defending employment after a singular focus on battling inflation beginning in early 2022. With inflation now nearing its 2% target, Fed officials last month cut their benchmark interest rate by half a percentage point and forecast more cuts ahead, hoping that will ease financial pressures on households and businesses and allow job growth to continue.”It will take a few months for the drop in interest rates to impact employer costs, as well as consumer savings accounts,” Challenger said. “Consumer spending is projected to increase, which may lead to more demand for workers in consumer-facing sectors.”The technology sector led the September total with 11,430 announced job cuts, though the industry has seen 23% fewer reductions so far this year than in 2023. Indeed, other major sectors like healthcare, services and finance have also seen fewer announcements this year than last.Artificial intelligence was cited as the reason for nearly half of the tech sector’s cuts. Since AI has been tracked as a reason for layoffs in May 2023, nearly 17,000 job cuts have been attributed to it.The Challenger report comes ahead of the monthly nonfarm payrolls report due Friday from the Bureau of Labor Statistics. According to a Reuters poll of economists, that is expected to show employers added 140,000 new jobs in September, little changed from the 142,000 positions created in August. The unemployment rate is forecast to remain unchanged at 4.2%. More

LONDON (Reuters) – Global stocks dipped as European and Asian share indexes broadly retreated on Thursday, while oil prices rose further as markets weighed the risk of a widening Middle East conflict. Euro zone stocks were last down 0.5% , as investors digested weak business activity survey data from the bloc, while MSCI’s all-country index slipped 0.2%.Asia-Pacific shares outside Japan had earlier shed 1%, largely driven by Hong Kong stocks sagging after a sizzling rally, while several markets, including mainland China and South Korea, were closed for the day.Japan’s Nikkei bucked the trend, up 2% after the country’s newly elected prime minister Shigeru Ishiba said it was not the time to raise rates after meeting central bank governor Kazuo Ueda. Bank of Japan board member Asahi Noguchi later said rates would increase cautiously and slowly.Nasdaq futures fell 0.3% and S&P futures slipped 0.2%.Geopolitical tensions loomed large, after Israel bombed Beirut early on Thursday, following a year of clashes with Iran-backed Hezbollah.Oil prices gained on Thursday as concerns grew that the conflict could disrupt crude oil flows from the key exporting region, overshadowing a stronger global supply outlook. Brent and U.S. crude futures gained more than $1 each and were up at $75.27 and $71.52 respectively. “Oil’s had a good week. But in context, you’re looking at kind of low 70s versus summer levels in the 80s. So I don’t think there’s a signal from the market to say, brace yourself for major escalation… But it’s a volatile situation,” said Eren Osman, managing director of wealth management at Arbuthnot Latham.SAFE HAVEN FLOWS MUTEDSafe haven flows in the wider market have so far been muted. Spot gold dipped 0.4% on the day to $2,646.25, but remained near a record high.Treasury yields rose on Wednesday after a strong private payrolls report added to evidence of a healthy U.S labour market, lessening the risk of a big downside miss for Friday’s non-farm payrolls data.Two-year Treasury yields were last at 3.6642% on Thursday, while 10-year yields were at 3.8075%.Markets imply a 36% chance the Fed will cut interest rates by another 50 basis points in November, compared with almost 60% last week, and have around 70 basis points of easing priced in by year-end.In currencies, the euro was broadly flat at $1.10415, and not far from Wednesday’s low of $1.10325, a level last seen on Sept. 12, while the US dollar index gained 0.2% to 101.87. Sterling fell 1.1% to $1.3116 after Bank of England Governor Andrew Bailey told the Guardian newspaper that the central bank could become a “bit more aggressive” on rate cuts if inflation continued to ease. More

LONDON (Reuters) – The Bank of England could move more aggressively to cut interest rates if inflation pressures continue to weaken but conflict in the Middle East could push up oil prices, Governor Andrew Bailey said.Bailey told the Guardian newspaper the BoE could become “a bit more activist” and “a bit more aggressive” in its approach to lowering rates, if there was further welcome news on inflation for the central bank.Sterling – which has strengthened recently as investors saw fewer interest rates cuts in Britain than in other countries – was down by more than a cent against the U.S. dollar at 1025 GMT, on track for its biggest daily fall in almost six months.It also looked set for its sharpest daily drop against the euro in almost two years.Investors were assigning a 97% chance of a quarter-point interest rate cut by the BoE at its November meeting. On Wednesday, the chance of a cut next month was priced at 90%. The BoE’s benchmark Bank Rate now sits at 5% after August’s first reduction in borrowing costs in four years. The British central bank kept rates on hold last month but investors expect another quarter-point cut at its November meeting.Rob Wood, chief UK economist at Pantheon Macroeconomics, said the central bank seemed to be heading towards a speeding up of its rate cuts but the Monetary Policy Committee would still need to see an easing in wage growth and price pressure to cut borrowing costs in consecutive meetings. “The bar to MPC rate cuts in back-to-back meetings is falling, leaving the risks to our Bank Rate forecast skewed to faster cuts,” he said. “That said, we think the latest DMP fails to green light those faster cuts, with wage growth and price rises proving stubborn.” The BoE’s Decision Maker Panel survey and separate services sector data, both published on Thursday, suggested inflation pressures in the economy were weakening but remained stronger than normal.The DMP survey showed expectations for wage growth in the coming 12 months stood at 4.1%, down from an increase of 5.7% in the three months to September although it was unchanged for a third survey in a row.Services companies reported that the prices they charged rose at the slowest pace in nearly four years. The Guardian quoted Bailey as saying he was encouraged by how inflation pressures had proven less persistent than the Bank feared but the events in the Middle East posed a risk.”Geopolitical concerns are very serious,” Bailey told the newspaper. “It’s tragic what’s going on. There are obviously stresses and the real issue then is how they might interact with some still quite stretched markets in places.”He said there appeared to be “a strong commitment to keep the (oil) market stable” but “there’s a point beyond which that control could break down if things got really bad. You have to continuously watch this thing, because it could go wrong.” More