Shares fall, Middle East strife boosts oil and gold

[October 18, 2023]  By Amanda Cooper

LONDON (Reuters) -Global shares fell on Wednesday, while unease among investors about the risk of a widening conflict in the Middle East translated into a rise in the price of oil and gold.

Compounding the concern about the geopolitical situation was the prospect of no respite any time soon from high interest rates, following U.S. data that showed consumer spending picked up in September.

Bond markets took a battering the previous day, after U.S. retail sales increased more than expected last month, cementing expectations that economic growth picked up more than expected in the third quarter.

Furthermore, China reported annual economic growth of 4.9% in the third quarter, beating forecasts for 4.4%. Separate releases there painted a picture of a more resilient consumer, suggesting Beijing's stimulus measures may be paying off.

Investor sentiment was fragile, as Israeli and Palestinian authorities traded blame for the blast that killed hundreds at a Gaza hospital, complicating U.S. President Joe Biden's already fraught trip to the region.

The news helped push oil above $90 a barrel and fed a bid for gold, which usually struggles when bond yields rise, but did not overshadow the outlook for interest rates and inflation as the driving force for markets on Wednesday.

"The dominant force remains this reality of inflation and what it means for central banks and how U.S. exceptionalism keeps alive the risk of upsetting the Fed down the road," Lombard Odier chief economist Samy Chaar said.

"The dollar is not sharply on the rise and is relatively stable. The only thing is bond yields - in geopolitical stress you would expect bond yields to go down as a safe haven, the reality is bond yields have gone up."

Money markets show traders are betting more heavily on the Federal Reserve being forced to raise rates again, having recently signalled it may not need to do so. A move in November is still seen as just an 11% chance, but the probability for January climbed to 50% from 37%.

The market also again scaled back expectations for early rate cuts, with no chance of a move until June and around 54 basis points of easing implied for all of 2024.

GLOOM IN TECH STOCKS

Stocks retreated on Wednesday. The MSCI All-World index eased 0.2%, while in Europe, the STOXX 600 fell 0.6% and U.S. stock index futures were down 0.4-0.5%.

Tech stocks, which tend to suffer if interest rates rise, came under pressure. Adding to the drag on the sector was a drop on Tuesday in shares of Nvidia after news the Biden administration plans to halt shipments to China of more of its advanced artificial intelligence chips.

A passerby walks past an electric monitor displaying various countries' stock price index outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/File photo

Dutch semiconductor maker ASML was among those weighing most on the European market, down 1.8% after warning of flat sales in 2024.

Markets are now awaiting earnings from Netflix and Tesla later in the session.

Government bonds, meanwhile, attempted to recoup some losses. Yields on the two-year Treasury note, which rose by as much as 14 basis points to a 16-year high at one point on Tuesday, were down 2 bps on the day at 5.193%.

Ten-year yields were down 3 bps at 4.818%, having closed 11 bps higher the day before.

The Bank of Japan was forced to conduct an unscheduled operation to buy JGBs to restrain a rise in yields, while in the euro zone, German 10-year yields fell 1 bp to 2.87%.

More Fed comments are likely on Wednesday, with five officials scheduled to speak ahead of an appearance by Chair Jerome Powell on Thursday.

"We are in an environment where bad news is good news and good news depends on whether it's good enough to push the Fed," Jefferies strategist Mohit Kumar said.

"We are still in the camp of modestly long positions in risky assets. But we are keeping positions close to home given the geopolitical uncertainty," he added.

The rise in yields kept the U.S. dollar steady against a basket of currencies.

Safe-haven flows lifted gold 1.1% to $1,945 an ounce, well above its recent trough of $1,809. [GOL/]

Oil prices traded around two-week peaks, driven by concerns over the Middle East and data showing a fall in crude stocks.

Brent rose 2.6% to $92.21 a barrel, while U.S. crude rose 2.7% to $89 per barrel.

(Additional reporting by Wayne Cole in SydneyEditing by Emelia Sithole-Matarise and Mark Potter)

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