Monthly Market Outlook

In October, Middle East conflict dominated the markets, leading to rising energy prices and gold. The 10-year government bond yield reached 5% for the first time since 2007. Despite the rate hikes, US growth for the third quarter remained strong.

In November, the focus will be on the Israel-Gaza conflict and the possibility of another US government shutdown. However, the month will kick off with an FOMC meeting on the first day of November, followed by NFP data just two days later.

Macro View

The Middle East conflict has heightened geopolitical risks. The possibility of the current conflict expanding to Lebanon or even reaching Iran poses a significant threat to global markets. Gold saw a substantial rally in October, while Brent maintained high prices but has not experienced a similar surge thus far. The impending ground invasion may keep risks elevated for the time being, but the market’s true concern lies in the potential for the conflict to escalate. The Lebanon-Israel border is currently quite active, and Israel occasionally conducts airstrikes in parts of Syria. Above all, the involvement of Iran could have catastrophic consequences.

The new Speaker of the House has finally been elected in the US after days of chaos. The newly elected Speaker, Mike Johnson, will have a busy schedule ahead. The government will shut down on November 18 if Congress cannot pass a short-term measure or increase the debt ceiling in time. In addition to that, President Biden has asked Congress to pass a $106 billion foreign aid bill, which includes $61.4 billion for Ukraine and $14.3 billion for Israel. The House barely passed the bill to avert a government shutdown weeks ago, and that ultimately cost the previous House Speaker his position. Johnson, who is seen as relatively inexperienced in economic policy, will have a busy and challenging time in the coming days.

The Eurozone economy continues to remain weak. The incoming data throughout the month shows that Europe is struggling, and the future does not look bright at the moment. The Composite PMI fell to 46.5 for the first time since 2020. In addition to weak manufacturing, the services sector has also started to decline. Lagarde acknowledged the fact that the economy is struggling in the latest ECB press conference.

The UK economy has fared better than the Eurozone, but activity continues to slow. Despite the slowing activity and negative retail sales data, inflation seems to be holding on. The monthly increase was 0.5% in September, while year-on-year it remained at 6.7%.

Chinese PMI has shown early signs of recovery, but the economy is far from being in good shape for now. In addition to debt problems from various sectors, mainly from housing, demand is still weak, despite some recent recovery. President Xi made a rare visit to the central bank close to the end of October, and China decided on another stimulus package for a faster recovery.

The US economy is performing much better than many expected. Recession fears seem to be dissipating, as the 2-year and 10-year yield spread remains in negative territory but is recovering rapidly. The latest GDP figure came in at a robust 4.9%. Despite benefiting from various temporary boosts, over the last five quarters, US GDP has been very close to or mostly above the 20-year average of 2.2%. In addition to the GDP data, both the manufacturing and services PMI have risen above 50, indicating increased activity on both fronts. The Composite PMI has reached 51. Retail sales are rising faster than expected, the manufacturing sector is slowly picking up, and new home sales appear to be on an uptrend, even though the 30-year mortgage rate has reached 8%.

The job market remains strong despite some signs of weakness. JOLTS open job positions have surprisingly risen to nearly 10 million once again, while weekly new claims have stayed near 200k. Many of the early signal data from PMIs and local Fed activity data show that the demand for workers is still ongoing, and firms want to retain their employees despite rising prices. However, there is a weak signal coming from ongoing claims. Continuing claims appear to have finished their downtrend and are now rising rapidly, even though new claims do not show any significant spike.

Despite the positive data, the sharp rise in yields is further tightening the economy, as indicated by many Fed members throughout October. The 10-year bond yield has increased by as much as 5%. Additionally, household consumption has exceeded income for the past few months, and credit card debt has increased on a yearly basis, almost reaching 15%. When you factor in inflation and student debt repayments, the US economy might begin to slow in the coming months.

Inflation has slowed a bit but remains high enough for the Fed to consider keeping rates higher for a longer duration. Many Fed members, including Chair Powell, have mentioned that the rising yields are causing financial conditions to tighten, thus prompting the Fed to take a more restrained approach.

Overall, with a strong economy, tightening financial conditions, and a delicate household balance, along with the looming possibility of a US government shutdown, it is highly likely that the Fed will maintain its current rates in the upcoming meeting. Currently, the markets do not foresee a possibility of a rate hike in the November meeting, with only a 27% chance of one in the next two meetings. Despite positive data, expectations for a rate cut have moved closer to the June meeting by one month as well.

Central Bank Meeting Calendar

Technical View

US 10-year government bonds are still under significant selling pressure, although the 5% barrier is currently holding the yield surge at bay. The sharp uptrend does not appear to be sustainable, and if the US can avert the looming shutdown this month with some deficit-tightening measures, the yield may rejoin the previous trend and possibly test the downside. However, many risks persist. Consumption is exceedingly strong, government debt is rising at an unsustainable pace, and the shutdown risk is higher than it should be. A breakout above 5% could cause the uptrend to persist or even trigger panic selling of treasuries. Bond traders may face a challenging month, regardless of the outcome.

Brent oil was on the verge of a sharp decline after testing the $99 resistance, but the rise in geopolitical risks in the Middle East has temporarily supported the price. Additionally, new stimulus from China and a stronger-than-expected US economy are helping to maintain higher prices. However, demand could slow somewhat as US GDP returns to its long-term average, and the Eurozone remains weak due to higher rates.

For the first week, $87 can be considered as a support level. A break below this level could push the price toward $79. On the upside, developments in the Middle East will be the primary driver. Depending on the severity of the situation, if the risk of conflict escalation increases and gets out of hand, a strong upward reaction can be expected, possibly breaking through the $99 resistance.

Precious metals exhibited divergent performance in October due to geopolitical risks. Gold saw a significant surge as the conflict prompted a risk-off sentiment in the markets, resulting in an 8.5% increase. Silver also experienced a substantial jump, but by the final week of October, the momentum started to wane. Silver is considered more of an industrial metal in comparison to gold, and despite having some safe-haven qualities, its momentum may remain weaker relative to gold. Platinum initially benefited from the gold rally but, overall, had a rather flat month. On the other hand, Palladium faced a significant drop, nearly 10%.

The gold/silver ratio, which serves as a useful indicator for gold prices and typically exhibits a negative correlation, underwent a complete turnaround. Normally, silver prices lead gold due to their lower volume and sharper price movements. However, as the markets shifted into risk-off mode, the safe haven qualities of gold came into the spotlight. This effect was short-lived, and if the conflict doesn’t escalate to more dangerous levels, the correlation might return to being negative in the coming weeks. The US shutdown deadline will also be crucial to watch for potential risks. Historically, gold has tended to perform better before possible shutdowns.

ETFs’ gold holdings continued to decline in October and are now lower than they were before the COVID surge. However, last week, the ongoing selling trend temporarily paused as risks began to mount.

Gold experienced a massive surge in October, easily breaking through key resistance levels. After surpassing 1985, the next target appears to be 2033, followed by the previous top at 2063. However, on the fundamental side, the majority of the momentum is currently driven by market risks. If these risks diminish, gold could potentially experience a sharp decline, at least towards the key moving averages.

Silver had a roller coaster ride at the beginning of October. Following a sharp drop from 23.75 to below 21, it rebounded to test the 23.75 resistance once again. Now, the upward momentum appears to be subsiding, and prices could stabilize within the range of 22 to 23.75 until the market determines its next direction.

The dollar index exited the sharp uptrend channel in October and has since remained flat, fluctuating between the 105.40-105.75 support zone and the 107.20 resistance. The market is closely monitoring incoming data and expectations, as several risks are reducing market predictability. A break below 105.40 could intensify selling pressure and push the index toward the 200-day moving average. Conversely, a breakout above 107.20 might fuel further upside.

The stock markets had another challenging month in October. As markets attempted to recover from the nearly avoided government shutdown, geopolitical risks continued to mount. The MSCI World Index fell by over 4%, mirroring declines in the S&P 500, Dow Jones, and DAX indices. Surprisingly, the Nasdaq emerged as the best performer despite new chip restrictions imposed by the US on China. The new earnings season didn’t begin poorly for tech stocks. However, the rapid rise in yields and the approaching deadline for another shutdown are causes for concern. If things go well, markets could potentially rebound, especially in the second half of November.

VIX has once again risen above 18.75 and the 20 level. The elevated VIX is contributing to increased downside risk. A key level to watch for a calming effect would be 18.75. As long as the VIX remains above this level, bulls should exercise caution.

The market is currently in a risk-off mode, and the S&P 500 is being significantly affected. The uptrend that had been in place since 2022 is now over, and the downtrend is intensifying. The index has fallen below the critical 4200 level. If this level can be reclaimed, there may be hopes for a market recovery. However, as long as the index remains below it, there is a possibility of further downward movement toward 4068 and 3934.

The FX market exhibited uncertainty as the dollar index had a relatively flat month. EURUSD and GBPUSD experienced several fluctuations within October, but both ended the month with changes of less than 1%. JPY also had a calm month, and as USDJPY approached 150, expectations of possible intervention slowed the upward momentum. In contrast, CHF enjoyed a strong performance due to increased demand for safe havens.

EURUSD has put an end to the sharp downtrend that began in the summer. However, this breakout did not persist for long. The 50-day moving average halted the advances, and the price declined due to a hawkish stance from Powell, strong data from the US, and a weak Eurozone. The market appears uncertain about its direction at this point. Resistance is currently being formed by 1.0615 and the 50-day moving average. If a breakout above the 50-day average occurs, EURUSD could potentially rise above 1.08. On the downside, key support levels to monitor are 1.048 and 1.04. Various factors are affecting the price’s movement, making it challenging for both the dollar index and EURUSD to determine their trend direction.

EURUSD appears to be moving as anticipated to the downside, as the long-term trend had accumulated too many long positions. The net long positions have decreased to a healthier level, but the downward movement has been less pronounced compared to previous cycles thus far. If further downside is not experienced, this could potentially be a bullish signal for the long-term movement, possibly hinting at the end of the 15-year downtrend in 2024. However, risk reversals remain negative for the next year, even more so than in the previous month.

GBPUSD is still on a downward trend, but the Fibonacci 38.2% level at 1.2075 appears to have held the downward movements so far. Unless it is broken, there may be an opportunity to test the downtrend and reach the 1.23 resistance thereafter. The UK has remained relatively strong compared to the Eurozone, but high inflation poses a significant risk to the economy.

On the other hand, in case of further downward movement, a break of 1.2075 might signal that the downtrend will persist, leading the price towards the lower boundary of the trend channel, and possibly towards the 1.1745 support gradually.

USDJPY is currently close to the 150 mark, and concerns about intervention are quite high. There have been numerous speeches and discussions regarding possible intervention, which is preventing USDJPY from spiraling out of control, despite the BOJ’s many unscheduled bond purchases.

There are numerous unconfirmed reports suggesting that the BOJ will consider adjustments in bond curve control at the next meeting, including the possibility of another limit extension above 1%, as it becomes increasingly challenging and costly to maintain the 10-year yield below this level. Furthermore, the unexpected jump in Tokyo CPI to 3.3% is likely to support this decision.

Given the intervention threat and the potential actions by the BOJ, USDJPY may finally find some relief and drop below the 21-day moving average. However, it’s important to note that there are also valid reasons for upward pressure, so any potential downward correction could present a buying opportunity as long as the trend remains intact.