US stocks eke out small gains, African markets mixed
Global equities started off the week pressured by geopolitical developments in the Middle East but got a boost from the non-farm payroll data that confirmed that the US economy remains healthy and that the risk of recession, at least in the near term, stays low. US stocks eked out small gains by the close of week but stocks in Europe were down on growth concerns, while Japanese stocks sold off due to a stronger yen. Chinese stocks continued to rally on the stimulus package announce earlier. African markets were mixed.
From worries about a US economic “hard landing”, the debate has shifted to the potential for a so-called “no landing”, where the labour market continues to burn hot even as inflation cools. The story is so compelling that it completely absorbed the attention of traders and investors, even as Israeli bombs fell in Gaza and Lebanon, with Monday marking one year since the Hamas attack that triggered war.
Well, last week, September’s payroll numbers came in a lot stronger than expected. The US exceptionalism narrative, which had been on shaky footing last month, is standing tall – and king dollar is straddling its shoulders. Friday’s non-farm payrolls report showed the addition of 254 000 jobs in the US in September, significantly higher than the 132 500 consensus.
The data pointed to strong hiring in the labour market and led to investors dialling back their expectations for a large 50 basis point interest rate cut by the Federal Reserve in November to zero. However, expectations of a 25-basis point Fed rate cut and signs of a resilient US economy boosted demand for riskier assets.
Middle East tensions add to market uncertainty. Concerns about a possible escalation of the Middle East conflict remain a headwind for riskier assets. An increasing threat of a wider regional conflict could trigger a flight to safety, impacting demand for equities.
In the US, at the start of the week, bond prices climbed due to haven demand driven by geopolitical concerns. However, strong ISM Services data coupled with robust nonfarm payrolls caused bond prices to decline and yields to rise, as investors began expecting fewer rate cuts by the Fed. The Fed became hawkish last week noting that they are in no hurry to cut rates quickly, adding that the overall economy remains on a solid footing and that the Fed will lower interest rates “over time. “
Markets responded positively. However, sentiment was subdued for most of the week as traders kept a close eye on the escalating situation in the Middle East. A blowout jobs report in the US on Friday provided a much-needed boost to the mood.
On Tuesday, geopolitics were thrust into the spotlight after Iran launched about 200 missiles at Israel in retaliation for the killing of Hezbollah leader Hassan Nasrallah. The situation continued to grab eyeballs, especially on Thursday, amid expectations for an Israeli response. WTI crude oil futures surged more than 9 percent for the week, while the S&P 500 energy sector was the best-performing sector of the week. Higher oil prices can ignite inflationary pressures.
Last week, the US Equity Markets surged higher. The highly anticipated US Jobs Report drove demand for riskier assets, countering concerns about the escalation in the Middle East conflict. The Nasdaq rallied by 1.22 percent, while the Dow and the S&P 500 gained 0.81 percent and 0.90 percent, respectively.
Nikkei 225 rallied by 1.97 percent, as expectations of a dovish BoJ rate path and a weaker Yen drive export-focused stocks higher. ASX 200 rises 0.53 percent, tracking gains in US equity markets, with mining stocks supported by China’s policy measures.
In South Africa, the JSE All Share Index (ALSI) was down, closing at its lowest level in over a week as investors closely monitor developments in the Middle East. Other African markets were range bound with the ZSE ASI in Zimbabwe being an outlier on the positive side and the DSE ASI in Tanzania occupying the opposite end with five bourses closing flat.
Commodities and currencies
Oil prices steadied after experienced their largest one-week surge in nearly a year amid heightened geopolitical tensions. Fears of a potential Israeli strike on Iran’s oil facilities following missile attacks by Tehran-backed forces have created a volatile market atmosphere.
Over the past week, crude oil jumped nearly 8 percent, its biggest gain since last year, driven by concerns that Middle Eastern oil supplies could be disrupted due to escalating conflict. Iran, a significant oil producer, could see its output severely affected if key infrastructure is targeted, potentially removing up to 1.5 million barrels per day from the market. This disruption, combined with other regional risks like potential blockages of the Strait of Hormuz, could lead to further price spikes.
However, the market remains cautious, not fully pricing in an all-out conflict. The recent surge in oil prices could also fuel inflationary pressures, complicating central banks’ current easing path. Meanwhile, OPEC+ remains committed to restoring some production capacity starting in December, though weak demand in China and growing U.S. supplies pose challenges.
Gold prices edged lower as a stronger U.S. dollar pressured the metal, following increased speculation on dovish shifts by the Bank of England and the Bank of Japan. In the U.S., data revealed a modest rise in jobless claims, indicating stability in the labour market with only limited layoffs. Gold, which has gained nearly 30 percent this year, continues to attract robust central bank purchases and safe-haven demand amid global economic uncertainty.
Heightened geopolitical risks, particularly the growing hostilities between Israel and Iran, have also kept investors on edge. If the conflict escalates, with potential U.S. support for Israeli strikes on Iranian oil facilities, the resulting instability could further drive-up demand for gold. Despite the recent dip, bullion remains resilient, poised for potential gains depending on the central bank’s policy direction and ongoing geopolitical tensions.
The US Dollar (USD) surged to its best week in six months as the European, British and Japan hawks coo. The greenback strengthened against a basket of currencies, buoyed by geopolitical tensions and strong economic data as central banks around the world appear set to out-dove the Fed. The strong economic data from the US spurred the dollar.
This upbeat data provided solid support to the USD. Partly spurring the dollar last week was a ‘’safety bid’’ surrounding Middle East tensions, dollar gains mounted as speculation of another round of interest cuts in Europe were twinned with official hesitation at further monetary tightening in Japan with inflation subsiding everywhere.
Fed Chair Jerome Powell gave the dollar some tailwinds indicating that the Fed may proceed cautiously with future rate cuts, with markets currently pricing in a 68.9 percent chance of a 25 basis point cut and a 31.1 percent chance of a 50 basis points reduction. Looking ahead, the US economy is expected to add 140,000 jobs in September, with the Unemployment Rate remaining steady at 4.2 percent. These developments suggest continued volatility in the currency markets as traders react to upcoming data releases.
The yen, euro and sterling all fell, although the return of Japanese finance ministry jawboning helped to put a floor under the yen. The Euro remained under pressure near the 1.1035 mark against the stronger USD, extending its losing streak last week amid the risk of an inflation undershoot.
Markets caution ahead of key US economic data, combined with a hawkish stance on the USD, continues to weigh on the EUR/USD pair. The Fed solid economic reports, including the better-than-expected US ISM Services PMI and ADP Employment Change data, have challenged the market’s earlier dovish expectations for the Fed’s monetary policy, providing support to the USD.
In the Eurozone, the latest inflation reading has raised expectations of a potential rate cut by the European Central Bank (ECB) in October. The market is now reflecting a 95percent probability of a 25 basis point rate cut this month, which would be the ECB’s third reduction this year. This dovish sentiment around the ECB, combined with the increasingly restrictive policy environment, is weighing heavily on the Euro. The Japanese yen depreciated, trading at ¥146.8 to the dollar after the new Prime Minister Shigeru Ishiba dovish comments, which got support from the economy minister.
The rand (impliedly the loti) lost ground last week, losing by 2 percent from the previous week and closing at R17.5/$. The drag mostly came from the stronger dollar after US Fed’s hawkish comments which dented hopes for more aggressive interest rate cuts this year. Further downside stemmed from risk-off trade following escalated tensions in the Middle East.
After the stronger than anticipated jobs report, investors will have a keen eye on Thursday’s US CPI inflation to check if the soft-landing narrative still holds. Geopolitical tensions in the Middle East will continue to grab eyeballs, so will be third quarter earnings which season kicks off this week. Markets want to see if momentum is broadening and gauge the viability of current stock market rally.
Until next week enjoy making money on capital markets.
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