Oil Gains, Stocks Steady, Gold Languishes

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The recent escalation of conflict between Israel and Palestine has sent shockwaves through global markets, turning previously soft gold and oil prices into a focus of heightened volatility and concernAs risk assets wavered, U.Sstock markets experienced slight pullbacks only to rebound shortly thereafter, illustrating a collective calmness amid turmoilNevertheless, energy prices remain a pivotal concern for traders and policymakers alike.

Amid escalating geopolitical risks, the market is particularly focused on oil supply disruptionsOn October 12, the U.SBureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 3.7% year-over-year in September, unchanged from the previous month and exceeding the anticipated increase of 3.6%. The month-over-month growth rate, however, slowed from 0.6% to 0.4%, surpassing the expected 0.3%. This information stressed the Federal Reserve's challenging fight against inflation and indicated a continued path toward potential interest rate hikes

The ongoing geopolitical strife adds another layer of complexity, intensifying fears about energy supply disruptions just as the cold winter temperatures loom on the horizon.

The implications of these trends cast a long shadow over monetary policy and could profoundly impact stock market dynamics and risk assets in the futureThe recent hostilities between Israel and Hamas have rekindled fears that Middle Eastern geopolitical instability could threaten global oil supplies and transportation stabilityOn the Monday following the outbreak of the conflict, West Texas Intermediate (WTI) crude oil opened with a significant bounce, closing up 4.3% at $86, moving back above its 50-day moving averageAt the forefront of these oil price forecasts is how the U.Swill deviate its stance towards Iran’s oil exports, particularly in light of recent reports suggesting that these exports have soared back up to approximately 1.5 million barrels per day.

Compounding the situation, the Israeli government made the decision to close a critical natural gas facility responsible for supplying 70% of the nation's energy needs while also exporting to neighboring countries and Europe

This led to a dramatic surge in European gas futures, which rose by 15% on that fateful Monday, causing German electricity prices for November to also spikeThus, Europe finds itself caught in the crossfire of this escalating crisis, bearing the brunt of the consequences.

There remains palpable uncertainty regarding the future trajectory of oil prices, but two primary concerns weigh heavily on the market: the diminished likelihood of Saudi Arabia and Israel normalizing their production capacities and the risks associated with Iran's oil outputBoth issues constitute upward pressure on oil prices, and there is a strong possibility seasonal factors could load additional increases by year-endFor instance, Goldman Sachs maintained its forecast that Brent crude prices could gradually climb from $85 per barrel last week to an estimated $100 per barrel by June 2024.

The motivation among OPEC ministers to continue production cuts is showing no signs of abating

Saudi Arabia's budget suggests that stabilizing oil prices at $90 remains a key objective, and the kingdom extended its voluntary daily oil production cuts of 1 million barrels until the end of DecemberData also indicates that U.Soil inventories are still underwhelming, reflecting a tight market supply.

Moreover, the Energy Information Administration (EIA) recently reported that U.Scrude inventories have dropped by 2.22 million barrels, experiencing a decline in seven of the past eight weeks, leading to the lowest inventory levels seen since 1985. Concurrently, Russian official statements indicated that OPEC+'s production cuts could be extended, yet should tensions in the Middle East abate, demand concerns might shift to the forefront of market apprehensions.

In stark contrast to the tumultuous global energy landscape, the U.Sstock market has displayed noticeable resilience, with the S&P 500's energy sector leading the charge amid recent market rallies

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Probing into underlying earnings news will be crucial to informing market sentiment in the near termDespite the widespread geopolitical events, significant fluctuations in U.Sequities have largely remained unaffected, showcasing volatility in a predominantly upward trend over recent days.

Investors took note of the minutes from the Federal Reserve's recent meeting, during which all committee members unanimously expressed that maintaining higher rates for an extended duration is necessary until inflation shows signs of taperingHowever, Tensions around the outlook for interest rates have emerged as most members leaned towards supporting another rate hikeA noticeable shift in some members' perspectives has emerged recently, leading them to argue that the elevated yields have effectively functioned as a rate hike substitute and are now calling for a pause in rate increases.

Further compounding this context, the stronger-than-anticipated CPI in the evening of the same day fueled expectations that the Federal Reserve would maintain high-interest rates for a longer duration and could initiate another rate hike in the coming months

Swap contract pricing now reflects a significant increase, with the predicted likelihood of another rate hike this year surging to nearly 50%, up from around 30% just a few days earlier, while anticipations for the first easing next year have also pushed back from June to July.

Despite positive market sentiment, U.Sequity indices, led by a hawkish tone from the Fed and optimistic data, have managed to rally for four consecutive daysEarlier statements from the Dallas Federal Reserve voiced a more dovish outlook, arguing that soaring U.STreasury yields are serving effectively as an alternative form of monetary tightening.

Fed pivots have allowed the Nasdaq 100 index to near its 100-day moving averages, closing at 15,184.1 pointsTraders should watch the resistance situated around 15,100, as any breakthrough could lead to a challenge of the previous highs around 15,520. Looking specifically at the S&P 500, it has opened the new month and quarter credibly, having increased for two consecutive weeks, shrugging off roughly one-third of its September declines

Observers question whether this upswing marks the beginning of a more meaningful recovery, which will depend on macro factors such as bond yields, risk sentiment, and the upcoming earnings season.

Through the lens of short-term technical analysis, bullish sentiment surrounding the S&P 500 post-recent fluctuations has maintained a firm footingThe index has testily located strong support within the upper limits of the long-term support range between 4,156 and 4,209. Even as the index threatens to retrace, bullish traders will find some solace in its sustained positions above this thresholdWith upcoming tactical targets establishing themselves around 4,335-4,356, any potential decline could be perceived as an opportunity, albeit one challenging to unlock unless the S&P 500 decisively overcomes the resistance range between 4,335 and 4,356, paving a path toward further upside around 4,430.

The long-term bullish trend remains intact after the dramatic shifts observed in September

Bears will soon find themselves in the waiting game for new signals signaling short-sale opportunitiesShort-term performance will hinge largely upon forthcoming earnings reportsOn the evening of October 13, we will kick off the earnings season, with financial giants like JPMorgan Chase, Wells Fargo, and Citigroup reporting their resultsThe following week, Bank of America, Goldman Sachs, and Morgan Stanley are set to follow suit, leading the charge in what promises to be a crucial earnings period.

Finally, mark your calendars for a significant macro indicator — the University of Michigan’s Consumer Confidence IndexDespite rising borrowing costs and persistent inflation pressures, consumer sentiment has shown signs of recovery since mid-last yearConcerns regarding the potential for prolonged elevated rates have led to volatility in financial markets recentlyShould these worries start echoing among consumers and lead them to cut back on discretionary spending, the resulting scenario could culminate in economic stagnation

The Michigan survey will provide essential insights into how this scenario may manifest.

While gold prices have recovered slightly, the extent remains limited amid the backdrop of clearer signals for rate cutsThe performance of gold is invariably linked with the prevailing geopolitical risks and inflationary pressures impacting global markets.

Gold exhibited notable resilience immediately following the attacks in Israel, gaining considerable buying interest amid increased bastion sentiment, which countered the prevailing strength of the U.SdollarGold prices soared to $1,876 per ounce as of 1:00 PM on October 13, marking a rebound of nearly $50 from the lows experienced on October 4.

Prior to the escalation of the Israel-Palestine conflict, gold prices swiftly descended below $1,900 to levels approaching $1,820. The sharp oversold signal from the RSI indicator pointed to a corrective rebound, which eventually materialized

Nevertheless, barring any major reversals in the dollar's trajectory, gold is likely to face constraints, with limited upward momentum anticipatedInitial bullish targets now stand at $1,848, while a secondary goal edges near $1,885.

In the latter half of this year, gold's sluggish performance has largely been a product of the robust U.Sdollar and soaring Treasury yieldsAlthough a short-term bounce in gold is palpable, anything substantial may hinge on the Federal Reserve signaling clear rate cutsBy the end of September, the dollar index had appreciated for 11 consecutive weeks, culminating in a cumulative increase of nearly 7% — an uptick reminiscent of 2014’s encounters with similar aggregate gains across 22 of 27 weeksReports from CFTC indicate a rapid decline in speculative net long positions in gold during this period.

Moreover, long-term Treasury yields appear likely to remain at elevated levels, with speculation rising that the 10-year Treasury yield could breach the 5% threshold, further pressuring gold prices

Amid a significant climb in U.Sdeficits, the supply of government debt continues to swell, resulting in challenges for yields to recedeThe Treasury market witnessed its worst day since March 2020 on October 12, accompanied by a rare disappointing auction of the 30-year Treasury bonds, signaling waning demand for government bondsAs primary dealers were compelled to accept yields at unprecedented levels, the auction closing reported a yield of 4.837%, levels not seen since August 2007, nearly 50 basis points above previous auction figures.

It is essential to note that if the core CPI continues its descent, dipping below 4%, expectations surrounding dovish sentiment could escalate, consequently igniting a bullish resurgence in gold to challenge resistance at $1,890-$1,900. Conversely, should CPI robustly rebound, coupled with resurgent Treasury yields, this may potentially thwart gold's short-term recovery trajectory.

(This article reflects the author's personal views and does not represent the publication's position

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