No Escalation Not Good Enough

Swissquote

Palestinian-Israeli conflict

Stocks

Commodity

Summary:

Israel told the U.S. 'to embrace for a long war'.

Stocks gained, and bonds fell yesterday on U.S. and allies' efforts to deescalate tensions in the Middle East. Yet Israel told the U.S. 'to embrace for a long war'.

We know that no matter how bad the situation gets in the Middle East, the way, and the intensity with which the market perceives the news will gradually decrease, and risk assets like gold and Swiss franc will eventually give back gains. But, right now, it is still too early to lower one's guard, as Israel hasn't said its last word yet. The risk of an Israeli offensive remains high, and there is a strong possibility of a sharp decline in appetite if diplomatic efforts fail.

From a price perspective, gold remains in ambush a touch lower than its 200-DMA and could rapidly jump to and above the $2000 per ounce mark in case of further bad news from the Middle East. The U.S. 10-year yield could quickly snap back to 4.50%, and oil could hop. Yesterday, the overall market relief led oil prices lower. News that the U.S. and Venezuela are set to resume talks with a strong potential for Biden administration to ease sanctions against the Venezuelan oil helped. But upside risks prevail. Iranian implication in tensions could send the barrel of oil above $100pb.

A risky place

The Gaza situation is not helping to improve relations between the U.S. and China since China picked the Palestinian side in the conflict. Therefore, it's little surprising that the U.S. considers further curbs on China's access to advanced semiconductors, or to machines that build the advanced semiconductors, if nothing, to make sure that China doesn't get the cutting-edge technology available for its military. Nvidia gained yesterday despite the news, but chip stocks are a risky place, not only due to a potentially escalating chip war between the U.S. and China, but also because, Israel plays an important role in the production of advanced chips, and tensions in Israel could further disturb the global supply chain for chips.

Data watch: Strong U.S. Retail Sales could boost appetite if Fed rate expectations remain contained

A potential return to low-risk assets could boost demand in U.S. sovereigns in the short run, but the faith of U.S. bonds is also tied to the economic data and what the Federal Reserve (Fed) will, or will not do in the coming meetings in the context of its own war against inflation. It's clear that a further escalation of tensions in Gaza, and a sustainable positive pressure in oil prices should boost inflation expectations and fuel rate hike bets for the year end. However, no more hike remains the base case scenario for now.

On the data front, the Empire Manufacturing index showed a slower-than-expected contraction in October, and the retail sales data for September will be released today. The number could be a strong one, given that September tends to be a good month for spending as children return to school. A strong data could fuel optimism if Fed speakers continue to hint at the end of monetary policy tightening. Note that strong U.S. spending has been one major pillar that explains why the U.S. economy remained so resilient to the Fed's aggressive tightening campaign. But behind the curtains, we see important vulnerability. The IMF data shows that unlike some European nations including Germany, France and the UK, the American savings took a very severe dive to pre-pandemic levels. And now that money is becoming rare, spending should slow, and help the Fed keep inflation on track towards its 2% target.

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Risk Disclosure

The risk of loss in trading financial instruments such as stocks, FX, commodities, futures, bonds, ETFs and crypto can be substantial. You may sustain a total loss of the funds that you deposit with your broker. Therefore, you should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

No decision to invest should be made without thoroughly conducting due diligence by yourself or consulting with your financial advisors. Our web content might not suit you since we don't know your financial conditions and investment needs. Our financial information might have latency or contain inaccuracy, so you should be fully responsible for any of your trading and investment decisions. The company will not be responsible for your capital loss.

Without getting permission from the website, you are not allowed to copy the website's graphics, texts, or trademarks. Intellectual property rights in the content or data incorporated into this website belong to its providers and exchange merchants.

Recent Searches

Top Searches

Markets

Analysis

User

24/7

Economic Calendar

Education

Data

No Escalation Not Good Enough

Risk Disclosure